With all that went on (or didn’t) in 2020, you may not have had time to consider the tax implications of the many things that COVID-19 changed.
So when it comes time to file your tax return, you might have questions such as, “Do I need to report the stimulus checks that I received as income on my tax return?” or “I worked from home for most of the year, can I deduct any of those expenses?”.
This tax season will be a bit unique compared to years past. For one thing, tax season is a bit delayed—the IRS typically begins accepting federal tax returns in late January, but this year, they opened the tax season on February 12, 2021. They have also extended the filing deadline for 2020 to May 17, 2021.
Below are some tips for filing your return based on what you may have been up to during 2020.
Tips for Filing Your 2020 Taxes If…
You Received a Stimulus Check
First, the good news—any amount of COVID-19 relief payment (termed Economic Impact Payment) that you received in 2020 is not taxable, meaning that you do not need to report the amounts received as income on your tax return.
Depending on how you filed your 2019 tax return, you may have received both Economic Impact Payments as either direct deposits into your bank account or as checks delivered to the address listed on your most recently filed tax return.
You Didn’t Receive a Stimulus Check (Or You Think It Is the Wrong Amount)
Be sure to check the IRS website to make sure that you received payments in the correct amount, depending on your family composition and income level. If you did not receive these payments and believe that you should have, or if payments received were not in the amount you expected, you may be eligible for the Recovery Rebate Credit to capture correct amounts via your 2020 tax return. Consult your tax accountant or visit IRS.gov for more information.
You Worked Remotely
So, you spent the majority of 2020 working out of your bedroom/living room couch/kitchen table/closet? You’re not alone.
Whether your 2020 office space was a well-worn spot on the couch or in a tastefully decorated home office, if you qualify as an employee, you are not eligible for a home office deduction due to tax changes implemented by the Tax Cuts and Jobs Act (TCJA). For tax purposes, employees are defined as those who work for employers and receive W-2 income for their work.
However, if you are self-employed or a small business owner, and if you work out of your home, you may be eligible for the home office deduction. This deduction can be calculated from an estimate using the simplified method or from actual expenses related to the space, such as insurance, utilities, and repairs. See IRS Publication 587 if you think you might be eligible.
Additionally, you can visit the IRS website to learn more about the home office deduction and how it may affect you.
You Lived in One State but Worked in Another
If you worked in one state but resided in another, be aware that you may face a state tax liability in both states. This won’t affect your federal income taxes, but it may open you up to a filing requirement in multiple jurisdictions. In most cases, taxpayers receive a tax credit, or a reduction of tax liability dollar-for-dollar, to eliminate double taxation of the same income. Be sure to visit the department of taxation website for any states in which you live and/or work for specific instructions.
You Received Unemployment Compensation
When unemployment rates rose in 2020, the government responded with increases to unemployment insurance benefits. With the passage of the American Resue Plan, for 2020 if your modified Adjusted Gross Income (AGI) is less than $150,000 and you received unemployment compensation, you can exclude up to $10,200 of unemployment compensation. For married individuals, the $10,200 applies to each spouse individually. You can find more information on unemployment compensation on the IRS website.
You Made Qualifying Cash Donations (Even if You Don’t Itemize!)
When the TCJA increased the amount of the standard deduction in the 2018 tax year, far fewer taxpayers itemized their deductions. This means that many folks lost the opportunity to claim deductions related to their charitable contributions on their tax returns. But this has changed slightly for this tax year.
Recent law changes allow most individual taxpayers to claim a deduction of up to $300 for cash donations made to a qualifying charity during 2020, even if they don’t itemize their deductions. That means you may be eligible for an additional $300 deduction on top of the standard deduction amount if you contributed and have the related documentation for up to $300 donated via cash, check, credit, or debit card. One thing to keep in mind—this additional deduction is calculated per return, so married filers are eligible for the same $300 deduction as single filers.
You Qualify for the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC)
If you are eligible for either the EITC or the CTC, note that policymakers adjusted the way these credits are calculated for the 2020 tax year. Relief policy allows for a “lookback” provision, which simply means that when calculating credit eligibility for both types of credits, taxpayers can use either 2019 or 2020 earnings amounts. Be sure to compare earned income for both 2019 and 2020 to see which scenario produces the largest credit amount for you.
You Had a Baby
If you had a baby in 2020 (congratulations!), the government hasn’t forgotten about your new little bundle when it comes to the stimulus payments. Parents to children born during 2020 will be eligible for up to $1,100 in stimulus relief, provided they have not already received stimulus checks, and they meet income limitations.
You Borrowed From Your Retirement Plan
Finally, if you took advantage of a coronavirus-related distribution from an eligible retirement plan—which was permitted under the CARES Act—these distributions are not subject to the 10% additional tax typically assessed to early withdrawal if you are designated as a qualified individual. The IRS website provides further detail on who qualifies.
2020 was a challenge, but filing your 2020 tax return doesn’t have to be. The above guide is designed to help you take advantage of the relief offered by lawmakers. When in doubt, visit the IRS website to help answer any questions related to your specific circumstances.
Federal tax policy, including income tax brackets, rates, credits, deductions, refunds, application, etc., is regulated by the Internal Revenue Service of the U.S., and subject to change on a yearly basis. For the most recent information and updates, consult the official IRS website. Our content is for informational purposes only and is not intended as legal, tax or financial advice.