The CARES Act, a direct response to the economic turmoil caused by COVID-19, sought to provide financial support and relief to millions of Americans. This support includes some new changes in tax rules for 2020, creating potential additional benefits depending on your circumstances. Read on to learn five ways these changes could affect your taxes.
Impact #1: Stimulus Checks & Tax Credits
Millions of Americans received stimulus checks during 2020 and early 2021 - the first for $1,200 and the second for $600. These stimulus checks were also referred to as Economic Impact Payments or Recovery Rebate Credit. According to the IRS, if you did not receive these payments (and were eligible to do so) then you may be able to deduct them from your 2020 taxes.1 There are a few requirements you must meet before filing for this reduction.
- Be a U.S. citizen or resident alien during 2020
- Must not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
Impact #2: CARES Act & Retirement Accounts
The CARES Act allowed individuals adversely impacted by the Coronavirus and with an eligible retirement plan (for example a 401(k), 403(b), 457(b), Traditional IRA, Roth IRA and others) to withdraw their funds without incurring the standard 10 percent tax penalty due to an early distribution (see qualifying rules on the IRS website).2 Instead, these withdrawals were considered coronavirus-related distributions.
If you qualified and took such a withdrawal during 2020, you can choose how it impacts your gross income:2
- It will count as income tax over a three- or one-year period, depending on your choice.
- It can be repaid before the end of the three-year period to receive a tax refund.
Impact #3: Charitable Gift Deductions
Charitable deductions are often a great source of tax relief for filers. In 2020, the CARES Act provided some changes to charitable donations rules, allowing filers who take a standard deduction to benefit from charitable donations as well. Tax filers taking a standard deduction may now deduct $300 of cash donations on top of their standard deduction.3
Impact #4: Unemployment Benefits
There are a variety of unemployment benefit options for those that lost their jobs during the pandemic. Unemployment benefits are normally considered taxable income, but whether they are taxed in 2020 will depend entirely on the type of program.4 Make sure to check with your unemployment benefits provider to determine whether or not you will need to pay taxes on your unemployment.
Impact #5: Tax Benefits for Business Owners
Business owners received two main benefits through the CARES Act: the Credit for Sick and Family Leave and the Employee Retention Credit.5 When filing taxes at the end of the year, consider whether the changes in the way you have had to do business in 2020 may allow you to benefit from other tax breaks beyond the CARES Act.
For example, many small business owners have been forced to close down their physical location, opting for remote work. Depending on the circumstances, these business owners may be able to claim their home as a home office, gaining a home office deduction on their 2020 taxes.
2020 was a challenging year, and understanding the governmental support offered through new tax rules can help promote your financial wellbeing this tax season. Whether you’re filing your taxes soon or still gathering your papers, remember to contact your fee-only financial planner for tax filing and tax planning advice.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.