The coronavirus pandemic has made 2020 a year marked with uncertainty and change. Taxes are no exception. As the federal government sought to protect people’s financial welfare during the COVID-19 economic shutdowns, it added new tax laws and changed others. If you took advantage of any coronavirus-related stimulus programs or your employment status changed, it may impact your personal tax return.
Here are some answers to frequently asked questions about the tax impacts of coronavirus stimulus programs and job changes for individuals:
Is my Economic Impact Payment (EIP stimulus payment) taxable?
No, you do not have to pay taxes on your coronavirus EIP stimulus payment. You do need to reconcile it on your 2020 income tax return though. The EIP stimulus payment was an advance on a 2020 tax credit.
If you did not receive an EIP because your income was too high, you may still receive one when you file your 2020 income tax return if you qualify.
Is the coronavirus related withdrawal I took from my 401K or IRA taxable?
Yes, COVID-19 withdrawals of up to $100,000 from retirement plans are taxable over a three-year period. However, the 10 percent penalty was eliminated for early withdrawals.
You may repay these withdrawals at any time within three years of receiving the distributions. You would then amend your income tax return(s) to receive a refund for taxes paid.
How long do I have to pay back the loan I took from my retirement plan?
The CARES Act provision allows an additional year for repayment of loans from eligible retirement plans. You can defer payment for up to a year; however, interest on the loan accrues on the balance and is not tax-deductible.
Can I deduct charitable contributions without itemizing deductions?
You may claim a 2020 charitable deduction up to $300 without itemizing deductions on your 2020 tax return. There are a few rules to follow.
First, the donation(s) must be money (cash, check, credit card, payroll deduction). Donations of items such as clothing to Goodwill do not qualify.
Second, the donation(s) must go to a qualified charity. Donations to individuals such as through a Go Fund Me account are not eligible. You may search for eligible charities through the IRS’ Tax Exempt Organization Search.
Third, you should keep proof of your donation(s). Acknowledgment letters from the charity, online receipts, and canceled checks are examples.
How do unemployment benefits affect my tax situation?
Unemployment benefits, including the $600 Federal supplements, are taxable. If you did not have income taxes withheld or make quarterly estimated tax payments, you could have an unexpected tax bill when you file your tax returns. You may also owe underpayment penalties and interest.
If you are one of the millions of Americans who are out of work and collecting unemployment right now, your annual income is probably going to be quite different from last year. You should take a look at your tax withholdings and adjust them if necessary. The IRS has a tax withholding calculator to assist you.
If you are someone who was earning more on unemployment benefits than you did working, you could owe more taxes than you are used to paying. If unemployment benefits put you on the edge of a tax bracket, you might consider stashing some money in a tax-deferred retirement account to keep your income in the lower tax bracket.
How does my freelance or contract work to supplement my income during the pandemic affect my taxes?
Taking on extra jobs to make up for lost hours can help keep up your cash flow. However, this change in work due to coronavirus will also impact your taxes. Here’s why: more jobs mean more complex income tax withholding (the money held out from your paycheck).
If you’re doing contract work (where you don’t receive a W-2), you should make quarterly estimated payments to keep on top of your tax obligations as these jobs don’t withhold any money for taxes. You will need to cover not only your income taxes but also self-employment taxes (social security and medicare).
Tax implications are tied to so many aspects of our lives. It’s helpful to have an expert in your corner, who can answer your questions.
Want to learn more about how Healy Tax, LLC can help you navigate the complicated, ever-changing personal tax landscape? Let’s Connect!
About the author:
Anne Redgrave joined Healy Group to lead Healy Tax, LLC. Anne is a federally-authorized tax practitioner enrolled to represent clients before the Internal Revenue Service for tax issues. She also prepares individual and small business tax returns, and helps clients with tax planning and consulting, and reasonable compensation calculations.
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