personal finance

Tax season is upon us. Here's what's new for your 2020 return


You might want to buckle up for this tax season.

Whether due to pandemic-related relief, remote work or no work, individuals may find that preparing their 2020 taxes is a bigger challenge than usual.

“I think it’s going to be much more complicated,” said Julio Gonzalez, CEO of Engineered Tax Services.

This year, the IRS will handle an estimated 150 million returns, with the filing deadline set for the usual April 15. The agency began accepting returns on Feb. 12.

Here are some ways that preparing your tax return could be different this year.

Stimulus payments

Unemployment benefits

While no federal tax law has changed regarding unemployment benefits, about 40 million Americans received those payments last year, according to The Century Foundation. And yes, the money is taxable at the federal level (state laws may be different).

However, not all taxpayers on unemployment have taxes taken out of their benefits. And for those who do, the federal withholding rate is a flat 10% — which may or may not be an adequate amount to avoid a bill at tax time.

“We might have a lot of people who didn’t have taxes withheld, and it could be a big surprise when they are filing their 2020 returns,” Walker said.

You should receive a Form 1099-G showing unemployment benefits paid. Even if you do not, however, you are still expected to report that income. Be aware that the IRS gets all the information detailed on any tax form you receive (or should have received).

Remote work

If you were among the many people who ended up working remotely last year, there are a couple of tax aspects that may come into play.

For starters, assuming you are a full-time employee for a company — i.e., you receive a W-2 from your employer — expenses incurred while working from home are not tax-deductible.

The only taxpayers who are permitted to write off business expenses or take a deduction for a home office are generally the self-employed (i.e., an independent contractor).

Additionally, if you worked remotely in a different state last year, your taxation at the state level could be different from previous years.

“This might sneak up on people because different states have different rules and it can get complicated,” Walker said.

Depending on the specifics, you may owe taxes in both the state where you worked remotely and the state where you were working before going remote, Walker said. Or, you might get a credit from one of the states so you’re not double-taxed.

“This is something you may need to talk with a CPA about,” Walker said.

Charitable deduction for all

The standard rule under current tax law is that you must itemize your deductions to get a break for making charitable contributions. Most people take the standard deduction, which is $12,400 for individuals or $24,800 for married couples.

For your 2020 return, the rule is a little different.

While non-itemizers still can’t write off non-cash donations, they can take an above-the-line deduction — which reduces taxable income — of up to $300 for qualified charitable cash donations. That limit applies to each return, whether filing individually or as a married couple filing jointly. 

Additionally, taxpayers who itemize on their 2020 return can deduct qualified cash contributions worth up to 100% of their adjusted gross income. (This is a one-year adjustment from the usual limit of 60% of AGI.) 

Retirement distributions

Under typical rules, anyone under age 59½ who withdraws money from their 401(k) plan or individual retirement account not only pays taxes on the distribution, but a 10% early-withdrawal penalty, as well, unless they meet an exception.

The CARES Act, passed last March, temporarily added Covid-related withdrawals to the list exempt from the penalty. So if you took an early distribution from your 401(k) or IRA in 2020 due to adverse financial consequences related to the pandemic — i.e., job loss or reduced hours, child care issues, illness from Covid, etc. — you will pay no penalty, but you will still owe taxes.

While you can spread out those taxes over three years, you will owe something on your 2020 return.

“You have to have at least a third of it taxed for 2020,” Walker said. 

If you end up putting the distributed amount back into your account within three years as allowed under the CARES Act, you can get reimbursed for the taxes you had paid on the money.

“You’d have to go back and amend your returns to get the tax back,” Walker said.

Popular tax credits

Part of the December $900 billion coronavirus relief package temporarily adjusted how both the child tax credit and the earned income tax credit are calculated. 

For your 2020 tax return, you have the option of using your 2019 income to calculate your eligibility for those credits, which are based on earned income. Anyone who usually qualified for those credits but received 2020 unemployment — which is not considered earned income — otherwise might have faced a loss of those credits.



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.