Know these 6 ways COVID-19 could affect taxes before filing your 2020 income taxes.
6 Ways COVID-19 Affects How You File Income Taxes in 2021
The COVID-19 pandemic caused record unemployment, medical and hospital bills and reduced income for people nationwide. There are few people who wish to relive 2020, but unfortunately, tax season brings that year sharply into focus once again.
When you file your income taxes in 2021, how much you must pay in taxes could be determined by several factors related to COVID-19. You’ll also need to know how to report – or maybe even receive a credit for – economic stimulus payments paid as part of two massive government relief packages.
Click or swipe to learn 6 ways COVID-19 could affect your 2020 income taxes.
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1. You may be eligible for a recovery rebate credit
Most Americans who fell within the income limit of $75,000 for individual taxpayers received two direct economic Impact payments in 2020 – one for $1,200 ($2,400 for married couples filing jointly and an additional $500 for each child) in the spring and another $600 direct stimulus payment ($1,200 for married couples filing jointly, and an additional $600 for each child) at the end of the year.
You may be eligible for a recovery rebate credit if you didn’t receive the full amount of the economic impact payments. The payments were based on your 2018 and 2019 tax information, but the recovery rebate credit is based on your 2020 tax information.
To find out if you are eligible for the credit, complete the recovery rebate credit worksheet on page 58 in the Form 1040 instructions.
Find out: How to File Taxes Like a Pro
2. You must pay taxes on unemployment benefits
If you filed a claim for unemployment benefits in 2020, that compensation isn’t necessarily tax-free. Normally, you must pay federal income taxes on the amount received. Many states also levy a state income tax on unemployment insurance compensation.
However, the American Rescue Plan Act of 2021, which became law in March 2021, waives federal income taxes on a portion of the amount received in unemployment compensation for 2020. That’s because the new rescue plan waives federal taxes on up to $10,200 for taxpayers with an Adjusted Gross Income (AGI) of less than $150,000 who received unemployment in 2020.
By now, you should have received a copy of IRS Form 1099-G, which shows the total amount you received in unemployment benefits in 2020. You must report this amount on line 7 of Form 1040. Didn’t receive Form 1099-G? Download a copy from your state unemployment agency’s official website.
3. Self-employed sick and family leave credits
If you’re self-employed, you’re probably used to not getting any sick pay. Due to COVID-19 pandemic, however, you may be eligible for sick leave and paid family leave credit for self-employed taxpayers.
The Families First Coronavirus Relief Act offers the credits to business owners with fewer than 500 workers whose employees missed work as a result of COVID-19 circumstances. However, these sick leave and paid family leave credits also provide for the self-employed, which includes freelancers and sole proprietors.
Find out: Where to Free Tax Advice
4. IRA contributions deduction
Previously, you had to be under the age of 70 ½ to take a deduction on your income taxes for contributions you made to a traditional IRA. That rule changed in 2020, however. Now you’re allowed to take a deduction on 1040 Schedule 1 for contributions you made to a traditional (not Roth) IRA during 2020.
Even if you have a Roth IRA, you may still qualify for the Retirement Savings Contributions Credit, also known as the “saver’s credit” on Form 1040 Schedule 3 if filing jointly with a spouse.
5. Minimum distribution rule waived
Usually, taxpayers with a traditional 401(k), traditional (not Roth) IRA and some similar retirement plans must take withdrawals from the accounts each year once they reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). If the participant doesn’t meet the required minimum distribution amount (RMD) during the tax year, the amount not withdrawn is taxed at 50%.
For 2020, however, the CARES Act waived the required minimum distribution rule during 2020 for IRAs and certain other retirement plans. “This waiver also includes RMDs if you turned age 70 ½ in 2019 and took your first RMD in 2020. You’re not required to have been affected by the coronavirus to waive your RMD for 2020,” according to the IRS.
6. Early withdrawal penalty waived
Previously, most people had to be at least 59½ years old to avoid paying a 10% penalty on early withdrawals taken from 401(k) or traditional IRA retirement accounts. While you must pay taxes on the amount withdrawn, if you’re under 59½, you won’t have to pay the 10% penalty on early withdrawals on amounts up to $100,000 made in 2020.
The distributions must be coronavirus related, however, meaning you experienced negative financial circumstances due to the COVID-19 pandemic.
Published by Debt.com, LLC