The COVID-19 pandemic has affected Americans on so many levels, not the least of which are financial. Mandatory lock-downs, record unemployment and COVID-19-related medical bills, along with loss of income from time missed at work, became — and still remain — major concerns stemming from the pandemic.
This tax season, taxpayers must now consider certain COVID-19-related provisions when filing federal income taxes. Wondering how COVID-19 will affect the way you file taxes this spring for 2020? We’ve broken down some of the important changes here so you can get started on filing 2020 income taxes.
The CARES Act Could Impact Your Income Taxes
Financial relief arrived last March with the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES). The CARES Act provided emergency funding, loans and other assistance for businesses, hospitals and government agencies in response to the coronavirus.
The CARES Act offered relief to individuals and families, too, including direct stimulus payments and a moratorium on foreclosures and evictions. Provisions also suspended student loan payments and interest, and made temporary changes to retirement account contributions and distribution rules.
In addition, the federal and state tax deadline, which generally falls on April 15 or the first business day after a holiday or weekend, was postponed until July 15, 2020. Now that 2021 is here, it’s time to prepare to file federal and state income taxes again. This year, Tax Day, which is the deadline for filing 2020 federal income taxes, is April 15.
What’s New for Filing Taxes in 2021?
The IRS made several changes when it comes to filing taxes this tax season. First, here are a few basic changes you need to know.
Increased Standard Deduction Amounts
With some exceptions, taxpayers who don’t itemize Schedule A deductions on 2020 income taxes are allowed to take the standard deduction amount. Taking the standard deduction reduces your amount of taxable income. For the 2020 tax year, the standard deduction amounts have been increased to:
- Single or married, filing separately: $12,400
- Married, filing jointly or qualifying widow(er): $24,800
- Head of household: $18,650
Charitable Deduction up to $300
Previously, you had to itemize charitable deductions on Schedule A. This tax filing season, however, if you take the standard deduction instead of itemizing, you may be able to take a deduction for charitable cash contributions made on or before December 31, 2020 on Form 1040 or 1040-SR, the tax return for seniors age 65 or older.
Single, head of household, qualifying widow(er) and married, filing jointly, can deduct up to $300. Married taxpayers filing separately can deduct up to $150.
Reporting Virtual Currency
For 2019, taxpayers reported virtual currency — a type of unregulated, virtual currency such as Bitcoin — transactions on Form 1040 Schedule 1. For tax year 2020, Form 1040 and 1040-SR contain a new question on page 1 regarding virtual currency transactions.
How Could COVID-19 Affect How You File Taxes This Year?
COVID-19 Economic Impact (Stimulus) Payments
Thanks to the CARES Act, most Americans with an annual income below $75,000, or $150,000 for married couples, received a direct stimulus payment in the spring of 2020, in the form of an advance “recovery rebate credit.” The payment, based on your 2018 or 2019 tax information, was $1,200 for individuals or $2,400 for married couples, plus $500 for each child in the household.
A second round of $600 stimulus payments for individuals and $1,200 for married couples, filing jointly, plus $600 for each child in the household, went out in December 2020 and January 2021. You aren’t required to pay taxes on the stimulus payment(s) you received, since that amount isn’t considered taxable income. However, if you didn’t receive the full stimulus payment amount — or any payment at all — you may be eligible for the recovery rebate credit for the 2020 tax year.
To be eligible for the recovery rebate credit on your 2020 federal income taxes, your stimulus payment(s) must have been less than the full amount you were owed. To determine whether you’re eligible for the recovery rebate credit, complete the Recovery Rebate Credit Worksheet in the 2020 Form 1040 instructions.
Taxes on Unemployment Benefits
If you’re one of the tens of millions of people who filed for unemployment insurance in 2020, you must pay federal income taxes — and, sometimes, state taxes as well — on unemployment insurance benefits when you file taxes in 2021.
Your state unemployment insurance agency will send a copy of IRS Form 1099-G, which shows the total amount of unemployment benefits received in 2020. If you don’t receive a 1099-G, go to your state unemployment agency’s website to download an electronic version. The amount listed must be reported on your 2020 returns.
Sick and Family Leave Credits for the Self-Employed
In 2020, the Families First Coronavirus Relief Act (FFCRA) provided sick leave and paid family leave credits to business owners with fewer than 500 workers whose employees missed work due to COVID-19-related circumstances. But the leave credits also apply to self-employed taxpayers, including freelancers and sole proprietors.
To qualify for the self-employed sick leave tax credit, you must have missed work between April 1, 2020, and December 31, 2020, due to a government quarantine or isolation order, self-quarantine ordered by a health care provider or because you experienced symptoms or received a diagnosis of COVID-19.
The amount for paid sick leave credits allowed for a self-employed person is 100% (up to $511 per day) of your average daily employment income for up to ten days for the taxable year. If you’re self-employed and couldn’t work because you were taking care of family members who were ill with COVID-19 or children at home due to school closures, the credit is up to 67% of equivalent wages for up to ten days. The maximum credit is $200 per day or $2,000 maximum.
If you’re self-employed and missed work because you had to take care of your kids when their schools or daycare closed, you may be able to take a family leave credit of 100% of your wages for up to 50 days. The maximum family leave credit is $200 per day, up to a maximum of $10,000.
IRA Contribution Deduction
In the past, taxpayers had to be under the age of 70 ½ to take a deduction for contributions to a traditional IRA. That’s no longer the case, however. Now you can take a deduction on 1040 Schedule 1 for contributions to a traditional IRA (not a Roth IRA) even if you are 70 ½ or older.
If you have a Roth IRA instead of a traditional IRA and are filing jointly with a spouse, you may still be able to take the Retirement Savings Contributions Credit (saver’s credit) on Form 1040 Schedule 3.
Penalty Waived on Early Withdrawals
Usually, you must be at least the age of 59 ½ to make withdrawals from a 401(k), IRA or similar retirement without having to pay a 10% early withdrawal penalty. However, in 2020, the CARES Act waived the penalty for early withdrawals up to $100,000 on “coronavirus-related” distributions for participants who experienced negative financial consequences due to the COVID-19 pandemic.
If you made early withdrawals from your 401(k) or traditional IRA, you will still owe taxes on the amounts. However, you don’t have to pay the full amount of taxes due on early withdrawals this year. For 2020 income taxes, participants can take up to three years to pay taxes due for early withdrawals from their retirement accounts.
That means if you took $9,000 in early withdrawals in 2020, you could pay the full amount this year if that’s what you prefer. Or, you could pay the total amount in increments over a three-year span.
Required Minimum Distribution Rules Suspended
Normally, traditional 401(k), traditional IRA (not Roth IRAs) and certain similar retirement plan participants are required to take withdrawals from the accounts each year once they reach the age of 72. Under Required Minimum Distribution (RMD) rules, if taxpayers 72 or older didn’t meet the minimum amount for retirement plan distributions, the amount not withdrawn was taxed at 50%.
For the 2020 tax year, however, the CARES Act suspended RMD rules. That means if you didn’t meet the usual required distribution requirements in 2020, you won’t be taxed on the amount not withdrawn.
Get Ready to File 2020 Taxes
According to the IRS, employers must provide W-2 and other wage statements to workers by February 1, 2021. Once you have the proper documents, it’s time to get started on figuring out which COVID-19-related changes may apply to your federal income taxes. Also, check your state income tax department’s website and instructions for any pandemic-related changes for tax year 2020.
Yes, 2020 was a tough year, but filing your taxes doesn’t have to be one more difficulty to overcome. The process of filing taxes can feel onerous, but having all the information you need can make the task more palatable. Worried you might miss tax credits you may be eligible for due to COVID-19?
Consider hiring a tax professional to complete your 2020 taxes to ensure accuracy. If you’re on a tight budget, you may even be able to locate a volunteer or tax preparer who works for free or on a sliding scale through a nationwide social services directory such as 211.
With all these important changes, how will you be filing your taxes this year? Mail, online tax software, or human tax preparer? Will this be different than previous years? Let us know in the comments below.
This informational material shall not be considered financial advice. The Hartford assumes no responsibility for any financial, investment, or tax-related decisions. Those seeking resolution of specific financial, legal, tax, or business issues, questions, or concerns regarding this topic should consult their own financial, investment, tax, legal, or other business consultants, advisors, or other professionals.