The 12 COVID Tax Changes You Need To Know Before Filing This Year
DALLAS (CBSDFW.COM) - In response to the pandemic, dozens of changes have been made to the tax code this year. Knowing these changes before you file your taxes, could lead to a much bigger refund.
"For a lot of taxpayers 2020 is going to be one of the most complex years they've ever had," said Dallas tax advisor Bill Dendy, CPA. "I think the biggest danger for a lot of people is leaving money on the table."
Here are the 12 COVID tax changes you need to know.
#1 Missing Stimulus Checks
For the millions of Americans who qualified but did not receive either their first or second stimulus check, this is your last chance. You can claim your stimulus payment as a tax credit on your tax return. Look for the line on your taxes that says "Recovery Rebate Credit" and follow the instructions.
#2 Unemployment Benefits
What's easy to overlook at time when you're financially struggling and out-of-work is that unemployment benefits are taxable income. Those who did not opt to have any income tax withheld from unemployment payments, the tax will be assessed when you file your return.
"This is one of the areas that may be a negative surprise for some people," Dendy said. "They may end up owing more tax than they anticipated because they didn't have enough withheld along the way."
#3 Early Retirement Withdraw
This year forced many people to dip into their 401k or IRA retirement account. In any other year if you did this and are younger than 59 ½, there's a 10% penalty but not this year. The penalty waived for up to $100,000 of COVID-related payouts. You'll still have to pay income tax on that money but if you put all back in the next three years, the income tax will be reimbursed.
#4 Home Office Deductions
Just because you were forced to work from home this year due to the pandemic, does not necessarily mean you can deduct your home office. This goes for anyone who works for a company or an individual.
If you are self-employed, you can take a home office deduction. However, Dendy said be sure to carefully document your deductions as this is an area the IRS will scrutinize.
#5 Sick Leave for Self-Employed
Self-employed people who couldn't work because they had COVID19 or had to care for a family member who had COVID19 can claim a new tax credit this year. The credit is equivalent to sick leave pay or family leave pay as if they were an employee. You'll need to fill a 7202 tax form. IRS.gov has instructions to calculate your refundable federal tax credit.
#6 Deferred Social Security Tax
From September through December, employers had the option of not collecting Social Security taxes. This was a way to help increase employees' take home pay and free up cash flow for the business during difficult times. However, this didn't eliminate the tax debt. It just delayed it. If your employer suspended the tax last year for those three months, it will have all to collect it from your paycheck this year. This means you'll have more than the standard 6.2% Social Security tax withheld from your paychecks.
#7 Tax-free student loans payments
Starting in 2020, employers could make a tax-free contribution of up to $5,250 a year to their employees' student debt. Employees don't have to pay taxes on those payments, either. This new tax incentive is good through 2025.
#8 "Lookback" Tax Credit Rule
The new rule allows taxpayers to use either their 2019 or 2020 income, whichever works out in your favor, in order to get the highest Earned Income Tax Credit as well as the highest Child Tax Credit. These are two of the most valuable tax credits for low and moderate income families. For many working families these tax credits could mean thousands of dollars. Usually, the less you earn, the higher the tax credit. However, enhanced federal unemployment benefits in 2020 could put some low income families at risk of missing out on these credits. Unemployment benefits are considered taxable income (see #2).
#9 PPP loan deduction
For small businesses not only are Payment Protection Program loans tax-free but expenses paid with a PPP loan are also deductible. Congress clarified this tax rule after the IRS initially issued a ruling to the contrary. Businesses typically deduct payroll and rent expenses on their taxes. Payroll and rent expenses were also expenses small business could use PPP loan money for to achieve forgiveness.
"This is like double benefit," Dendy said. "In a normal year this might not fly. However, because so many businesses are struggling, Congress clarified and said you can take those deductions and you don't have to count that as income."
#10 Charitable Deductions
Everyone who gave to charity last year will receive a special deduction as long as you put it on your tax return. For 2020, you can deduct up to $300 for charitable contributions. This is above the standard deduction line. In 2021, joint-filers will be able to deduct up to $600 for charitable contributions.
#11 Teacher COVID expenses
For 2020, teachers can deduct hand sanitizer, masks, as well as cleaning supplies they bought that were used in the classroom to protect against COVID19. Teachers can deduct up to $250 for expenses not reimbursed by the school.
#12 Filing early to maximize 3rd stimulus check
Even though Texans, due to the winter storms, have until June 15th to file taxes, experts say many will want to file their taxes early, especially if you are due a refund or had a drop in income in 2020. A third potential stimulus check will likely be sent out in the middle of tax filing season. To determine who qualifies for the potential $1,400 checks, the IRS will likely use whatever the latest tax return it has on hand. If your income dropped last year due to the pandemic, you'll want to file your 2020 return soon. That way, the IRS won't rely on the higher 2019 income.
The IRS also expects more people to file taxes this year than ever before. As of January 1st, the IRS was still processing close to 7 million paper tax return from last year.