In 2020, many different tax breaks were created to stimulate the economy and help businesses and individuals experiencing financial hardships due to the COVID-19 pandemic. Now that Americans are filing their business and personal taxes for last year, it’s important to know how to properly report these tax breaks.
1.Stimulus payments and the recovery rebate credit
The two rounds of stimulus payments paid to many Americans last year are not taxable and are treated as an advance of a special 2020 tax credit known as the recovery rebate credit. Go to www.irs.gov/account to set up a Secure Access account and check the payments the Internal Revenue Service (IRS) shows it sent to you. Accidentally doubling up on the tax break can slow down how quickly you receive a tax refund and can increase IRS scrutiny of your entire return.
NOTE: There is another proposed coronavirus relief package expected to include a third stimulus check that is currently awaiting final approval in the House. When you file (or if you already filed) your 2020 taxes, it may affect the amount of your check. In the legislation, single filers who have an adjusted gross income (AGI) of up to $75,000 and married filers who have and AGI of up to $150,000 will be eligible to receive a $1,400 payment for each member of the family. Children must be claimed as dependents to receive each of their $1,400 payments.
The amount of your check will be based on the greater of your 2019 or 2020 AGI. For example, if your AGI decreased to below $75,000 or $150,000 (depending on your filing status) in 2020 compared to 2019, you should file ASAP to maximize your stimulus payment. However, if you’d like your eligibility to be based on your 2019 AGI, it’s best to wait to file your return until after the third stimulus payment is distributed.
2.Taxpayers who take the Standard Deduction can also write off up to $300 of charitable cash contributions
On top of the Standard Deduction, non-itemizers can deduct up to $300 of cash donations paid to a 501(c)3 organization in 2020.
3.Revised Schedule SE allows for deferral of self-employment taxes
Self-employed workers pay Self-Employed Contributions Act (SECA) taxes on their net earnings by filing Schedule SE with Form 1040. From March 27 to Dec. 31, 2020, individuals who were self-employed can defer a portion of their SECA tax on earnings from self-employment.
4.Coronavirus-related distributions from your retirement accounts
If you took a coronavirus-related distribution from your 401(k) or Individual Retirement Account (IRA) in 2020, you must fill out Form 8915-E. There are tax benefits to these distributions, such as waiving the 10 percent fine on early payouts.
Additionally, the income reported to the IRS can be spread evenly over three years (2020-2022) for income taxation purposes. Also, the retirement distribution amounts can be paid back over a three-year period (2020-2022) and not be taxable. Taxpayers can amend their returns to receive refunds for the taxes paid in those years on their retirement distributions.
5.Unemployment benefits of up to $10,000 are not taxable
If you were one of the millions of Americans receiving unemployment benefits in 2020, those benefits up to $10,000 are not taxable per the recent Covid Relief Bill. The IRS warns that identity theft scammers are using stolen personal information of individuals to file fraudulent claims for unemployment compensation. If you got a 1099-G form in the mail for unemployment benefits you never received, the IRS advises you call the state agency that issued the form, explain the situation and ask the agency to send a corrected form.
6.Know the rules when claiming the earned income tax credit (EITC) on your tax return.
It’s important to understand the EITC rules because claiming the credit on your tax returns can be an audit red flag. Nearly half of all EITC errors pertain to the eligibility of a qualifying child for the credit. The IRS averages approximately 300,000 EITC audits a year out of the more than 25 million returns taking the credit.
Anthony Hoffmaster, CPA, CES, MST, is currently preparing and filing 2020 taxes for clients. Contact him by phone 919-435-4413 or email with tax-related questions or to inquire about filing your 2020 taxes.