The pandemic year of 2020 was a doozy. Besides affecting the health, jobs, home lives and psyches of millions of Americans, the pandemic may also have consequences for your tax bill.
Three giant legislative packages extended different types of coronavirus-related relief, including two rounds of checks, expanded unemployment benefits and a series of tax breaks. The latest, a $1.9 trillion package signed into law Thursday, will provide many people with yet another check.
Not surprisingly, taxpayers are confused: Can I qualify for a larger relief check? Would it be, um, wrong to pay myself the unspent money in my dependent care spending account because I did all of the caregiving while also working? (It feels right, but you probably know the legal answer to that one already.)
We highlighted some of the most significant changes below and tried to answer questions that are most likely to arise.
Are my unemployment benefits taxable?
Mostly. Unemployment insurance is generally subject to federal as well as state income tax, although there are exceptions. (Nine states do not impose their own income taxes, and another six exempt unemployment payments from taxation, according to the Tax Foundation.) But you will not owe so-called payroll taxes, which pay for Social Security and Medicare.
The new relief bill will make the first $10,200 of benefits tax-free if your income is less than $150,000. This applies to 2020 only. (If you have already filed your taxes, watch for IRS guidance.)
Unlike paychecks from an employer, taxes for unemployment are not automatically withheld. Recipients must opt in — and even when they do, federal taxes are withheld only at a flat rate of 10% of benefits. While the new tax break will provide a cushion, some people could still owe the IRS or certain states money.
“We have lots of folks owing a little to federal or getting a small refund,” said Russell Garofalo, founder of the tax firm Brass Taxes, based in Brooklyn, “and who are owing $2,000 or more to New York and New York City.”
If states like New York do not follow the federal changes, he added, taxpayers will owe money to states that tax unemployment.
Unemployment recipients should receive Form 1099-G, illustrating how much unemployment income they received and any taxes withheld, which should be used to fill out your tax return.
I didn’t collect unemployment income but I received a form that says I did.
You may be a victim of unemployment fraud, which was rampant last year. Reach out to your state agency and ask it to correct the 1099-G form, showing you did not collect anything, the IRS says. (Others may learn they were victims only after they file their taxes — because scam artists had the forms addressed to someplace other than their home.)
What about relief payments? Will they be taxed?
Nope. The so-called economic impact payments are not treated as income. In fact, they are technically an advance on a tax credit, known as the Recovery Rebate Credit.
The payments could indirectly affect what you pay in state income taxes in a handful of states where federal tax is deductible against state taxable income, as Ann Carrns wrote in The Times.
What should I do if I’m missing a relief payment or part of one?
You can recover it through the so-called Recovery Rebate Credit when filing your 2020 return. It can be found on line 30 of Form 1040 or 1040-SR.
The first round of checks was issued beginning in April (generally $1,200 for qualifying adults, $500 for children) and distribution of the second batch ($600 for adults and children) began in late December. The third is still to come.
For those first two rounds of payments, individuals with adjusted gross income of up to $75,000 ($112,500 for individuals filing as “head of,” typically single parents) and married couples filing jointly with income up to $150,000 qualified for the full payment. People with higher incomes got smaller payments or nothing if their income exceeded certain caps (the second payment disappears when income reaches $198,000 for a family of four, for example).
You will need to know how much you have already received to claim the credit; if you don’t have the notices detailing the amounts (Notice 1444 for the first relief payment and 1444-B for the second), you can find the information by setting up an individual online account. (Spouses filing jointly will have separate accounts).
The quickest way to receive the credit is by filing a tax return electronically and having the money deposited directly, even if you do not need to file otherwise. If you earn $72,000 or less, you can do it free through the IRS Free File program.
Could I be eligible for a larger check?
It’s possible, particularly if your financial situation or status changed last year.
The recovery credit on the 2020 return is based on an individual’s 2020 tax year information, while the second relief payment was based on the 2019 tax year. (For the first check, the IRS said, a 2018 return may have been used if the 2019 one was not filed or processed.) So if your income dropped in 2020 and you did not receive the full amount, you could potentially receive more.
The same goes for changes in life circumstances. If you had a child in 2020, for example, you may be eligible for more money, or maybe you are no longer a dependent on your parents’ tax return (and were in 2019), which may make you eligible.
Can families of mixed immigration status qualify for relief checks?
Immigrants in the country illegally and without Social Security numbers are ineligible for payments — and the CARES Act, the $2 trillion relief package signed into law in late March 2020, also prevented most spouses and children from receiving checks as well, even if they were U.S. citizens.
The December relief bill changed that, at least in part. Now, married couples filing joint returns may be eligible to recover payments for a spouse who has a valid Social Security number, the IRS said. Each child with a Social Security number is also eligible for payments.
To determine if you qualify, use the Recovery Rebate Credit Worksheet or tax preparation software.
A third relief check will be coming. How will my 2020 tax return affect my payment?
The latest relief package includes another payment of up to $1,400. The IRS will calculate payments based on your most recent tax return.
Millions of people saw their income plunge in 2020, so filing as soon as possible would ensure that they maximize the amount received. But if your income rose in 2020, you may not want to rush.
“To the extent that income in 2020 was higher than 2019, they may want to ‘slow-walk’ filing their 2020 income tax returns,” said Jeffrey Levine, chief planning officer at Buckingham Wealth Partners. “Filing soon may result in not getting a stimulus payment that might otherwise be received if the lower 2019 income figure is used.”
I worked from home this year. Can I take the home office deduction?
Probably not, unless you are self-employed, an independent contractor or a gig worker. The tax law overhaul of late 2019 eliminated the home office deduction for employees from 2018 through 2025. “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the IRS said.
Am I required to take my required minimum distributions from my retirement accounts?
Nope. People with certain tax-advantaged retirement plans, including individual retirement accounts and 401(k) or 403(b) plans, generally need to withdraw a prescribed amount each year, known as a required minimum distribution, once they hit a certain age (72 if your 70th birthday was July 1, 2019, or later; 70 1/2 for everyone else.)
But the CARES Act waived those rules for 2020 — so if you did not need the money, you could leave it be. The same goes for beneficiaries with inherited accounts.
If you withdrew money in 2020 — but then returned it to a tax-advantaged account by Aug. 31, as permitted by temporary rules — report it as a rollover.
I had to withdraw money from my retirement account. What are the rules for that?
More than 2 million people have pulled money from retirement accounts during the pandemic. During more normal times, withdrawing money from a tax-deferred savings account before age 59 1/2 would set off a 10% penalty on top of any income taxes.
But under the temporary rules of the CARES Act, people with needs related to the coronavirus were permitted to withdraw up to $100,000 from any combination of tax-deferred plans, including 401(k), 403(b) and traditional individual retirement accounts, without penalty. The distribution had to be taken by Dec. 30.
For tax purposes, the amount withdrawn is generally included in your income in equal amounts over three years, although you can opt to pay the entire bill this year.
Alternatively, you can return the money within three years and recover any tax paid by amending your returns. For example, if you took a distribution of $20,000 in 2020 and decided to repay the entire amount in 2022, you would need to file an amended federal tax return for 2020 and possibly 2021 to collect a refund, according to Randy Heidmann, a senior specialized consultant at Wolters Kluwer, an information services firm.
But if you return it all by the time you file, there will be no tax consequences.
All returned money — whether a portion or all of the distribution — is treated as a rollover but reported as a repayment on IRS Form 8915-E. (Form 1099-R will detail the amount of your distribution.)
Am I eligible for tax relief if I’ve endured wildfires or other disasters?
Yes. Legislation enacted at the end of 2020 provides relief for people who suffered economic losses because of a “qualified disaster,” as long as their main home was in a “qualified disaster area,” according to Wolters Kluwer.
Individuals can withdraw up to $100,000 from tax-advantaged retirement accounts — without paying an additional 10% penalty if they are under 59 1/2 — for incidents from Dec. 28, 2019, through Dec. 27, 2020. The deadline to withdraw the money is June 24, 2021.
The payback rules are generally the same as for coronavirus-related distributions and are reported on Form 8915-E.
Victims of certain winter storms — in Texas and Oklahoma — will have until June 15 to file their returns.
I’m self-employed and had to take time off because of the pandemic. Am I eligible for any relief?
Both credits have been extended into this year. Leave taken between Jan. 1, 2021, and Sept. 30, 2021, should be claimed on your 2021 tax form next tax season. Last year’s leave belongs on your 2020 return.
The credit for sick leave, which can be used for up to 10 working days, can be claimed by self-employed people who contracted COVID-19 or experienced symptoms and sought a diagnosis. It can also be used for days when you were ordered to stay at home by the local, state or federal government or if a health care provider suggested that you do so.
To calculate this credit, determine your average daily income. Take your net earnings (earnings after expenses, for 2020 or 2019) and divide by 260. Then multiply the number of sick days by that figure or $511, whichever is less.
A smaller sick-leave credit is available if you are unable to work because you are taking care of someone else for certain coronavirus-related reasons. This covers 67% of daily earnings, up to $200 a day.
How does the family leave credit work?
Self-employed people can take paid caregiving leave if their child’s school is closed or their usual child care provider is unavailable because of the outbreak. This works similarly to the smaller sick leave credit — 67% of average daily earnings (for either 2020 or 2019), up to $200 a day. But the caregiving leave can be taken for 50 days.
Is there now more flexibility with dependent and health care flexible spending accounts?
Maybe. Your employer needs to make the changes that are possible because of the pandemic.
Employers may allow people to carry over unused balances from 2020 into 2021. The same is true for leftover money at the end of the 2021 plan year.
Employers may also allow people to sign up for an account in the middle of the year or change the amount they originally elected to put in. If your plan has a grace period beyond the usual 12 months, it can extend it — but it cannot extend that period and also let you carry over balances from one plan year to the next.
HealthEquity, the benefits administrator formerly known as WageWorks, has an FAQ on the changes. It estimates that its customers’ employees could lose out on more than $500 million if employers do not carry out these provisions.
The CARES Act also made menstrual products eligible for health care flexible spending and health savings account reimbursement. This change is permanent.
My employer helped repay my student loans. What happens to my taxes?
Congress eliminated any income tax consequences for up to $5,250 that an employer repaid for a qualifying student loan in 2020. This could be money paid directly to a lender or loan servicer or given to an employee for this purpose. This applied only to payments that an employer made after March 27, 2020, and it was available only to people repaying debt for their own education — not, say, that of their child.
Can I still deduct student loan interest?
You can, but you may not have as much to deduct as last year.
Borrowers can generally deduct up to $2,500 in interest on qualified student loans, subject to certain income limits, even when they don’t itemize deductions. But starting March 13, the government paused payments and waived interest on most federal student loans.
Interest accrued on other eligible loans, including federal loans not owned by the government and those made by private institutions, can be deducted as usual.
Have rules changed on charitable giving?
Yes. This year, you can deduct up to $300 for charitable contributions, even if you use the standard deduction. Previously, only people who itemized could claim these deductions. Donations must be made in cash (for these purposes, this includes check, credit card or debit card) and cannot include securities, household items or other property. For 2021, the deduction limit will double to $600 for joint filers.
Rules for itemizers became more generous as well. The limit on charitable donations has been suspended, so individuals can contribute up to 100% of their adjusted gross income, up from 60%. But these donations must be made to public charities in cash; the old rules apply to contributions made to donor-advised funds, for example.
Both provisions are available through 2021.
Are there changes for child tax credits?
Yes. Taxpayers have a new option this year: They can use their 2019 income instead of 2020, if it is higher and will generally result in a larger credit. The provision is called the additional child tax credit.
In past years, the child tax credit could reduce your tax bill, dollar for dollar, by up to $2,000 a child — but if the credit exceeded your tax liability, you would not get any money back in a refund. That is where the additional child tax credit comes in: It lets you collect up to $1,400 a child as a refund, even if you do not owe any tax.
But eligible taxpayers must generally have at least $2,500 in earned income (unemployment income does not count) to claim the refundable portion, which is limited to 15% of earnings above $2,500.
The new relief law makes that credit more generous for 2021, particularly for low- and middle-income people.
Has the earned-income tax credit changed?
Yes. It still helps people at the lower end of the pay scale. But taxpayers can use their 2019 income for this credit, if it was higher (and more advantageous for receiving the tax credit).
The way it works is that as your earnings rise, so does the credit, but only until you hit an income ceiling. Only earned income factors into that calculation, so people who were unemployed for large parts of 2020 would not receive as large a credit as they might have had when they were working. Being allowed to “look back” to your 2019 earnings can increase your credit.
“It’s important to note that this look-back rule isn’t automatic,” said Jo Willetts, director of tax resources at Jackson Hewitt, a tax preparation service. If you are using the same tax software as last year, it will probably have your 2019 information on file to make the comparison. If not, have your 2019 tax return handy — so you can feed your earnings into the software, or to a new tax preparer — to determine which year is more beneficial.
The new legislation increases the size of the credit, broadens eligibility for childless people in 2021 and makes other changes.
What’s new for teachers?
Masks and hand sanitizer can be written off, even if you do not itemize.
Under the old rules, elementary and high school educators could typically deduct up to $250 in unreimbursed expenses for school-related books and supplies or costs related to professional development. Now, they can also deduct expenses incurred after March 12, 2020, for personal protective equipment and other supplies to help prevent the spread of coronavirus in class. But the total amount has not increased.