The 12 COVID Tax Changes You Need To Know Before You File This Year – CBS Dallas / Fort Worth
DALLAS (CBSDFW.COM) – In response to the pandemic, dozens of changes have been made to the tax code this year. Knowing about these changes before you file your taxes could result in a much larger refund.
“For many taxpayers, 2020 will be one of the most complex years they have ever seen,” said Dallas tax advisor Bill Dendy, CPA. “I think the biggest danger for a lot of people is leaving money on the table.”
Here are the 12 COVID tax changes you need to know.
# 1 Missing stimulation controls
For the millions of Americans who qualified but received neither their first nor their second stimulus check, this is your last chance. You can claim your stimulus payment as a tax credit on your tax return. Look for the line on your taxes that says “Recovery Rebate Credit” and follow the instructions.
# 2 Unemployment benefits
What is easy to forget when you are in financial difficulty and are unemployed is that unemployment benefits are taxable income. Those who have not opted for withholding income tax on unemployment benefits, the tax will be assessed when you file your return.
“This is one of the areas that can come as a negative surprise to some people,” Dendy said. “They may end up owing more taxes than they expected because they didn’t withhold enough along the way.”
# 3 Early retirement
This year, many people have had to dip into their 401k retirement account or IRA. In any other year, if you have done this and are under 59 and a half, there is a 10% penalty, but not this year. The penalty was waived for up to $ 100,000 in payments related to COVID. You will still have to pay income tax on this money, but if you postpone everything in the next three years, the income tax will be refunded.
# 4 Home office deductions
Just because you were forced to work from home this year due to the pandemic doesn’t mean you can deduct your home office. This goes for anyone who works for a company or an individual.
If you are self-employed, you can claim a home office deduction. However, Dendy said to document your deductions well as this is an area the IRS will look into.
# 5 Sick leave for self-employed workers
Self-employed workers who couldn’t work because they had COVID19 or had to care for a family member who had COVID19 can claim a new tax credit this year. The credit is equivalent to sick leave pay or family leave pay as if it were an employee. You will need to complete a tax form 7202. IRS.gov has instructions for calculating your federal refundable tax credit.
# 6 Deferred Social Security Tax
From September to December, employers had the option of not collecting social security contributions. It was a way to help increase employee take-home pay and free up cash for the business during tough times. However, this did not eliminate the tax debt. It just delayed him. If your employer suspended tax last year during those three months, they’ll have to get everything back on your paycheque this year. This means that you will have more than the standard 6.2% Social Security tax withheld from your paychecks.
# 7 tax-free student loan payments
From 2020, employers could make a tax-free contribution of up to $ 5,250 per year to their employees’ student loan debt. Employees also do not have to pay tax on these payments. This new tax incentive is valid until 2025.
# 8 “Retrospective” tax credit rule
The new rule allows taxpayers to use their 2019 or 2020 income, whichever is in their favor, to get the highest income tax credit as well as the highest child tax credit . These are two of the most valuable tax credits for low and modest income families. For many working families, these tax credits could amount to thousands of dollars. Usually, the less you earn, the higher the tax credit. However, increasing federal unemployment benefits in 2020 could put some low-income families at risk of missing those credits. Unemployment benefits are considered taxable income (see # 2).
# 9 PPP loan deduction
For small businesses, not only are Payment Protection Program loans tax exempt, expenses paid with a P3 loan are also deductible. Congress clarified this tax rule after the IRS initially ruled to the contrary. Businesses generally deduct payroll taxes and rents from their taxes. Payroll costs and rent were also expenses for which small businesses could use the P3 loan money to get a rebate.
“It’s like a double benefit,” Dendy said. “In a normal year, it might not fly. However, because so many businesses are in trouble, Congress has clarified and said that you can take these deductions and don’t have to count them as income.
# 10 Charitable deductions
Anyone who donated to charity in the last year will receive a special deduction as long as you report it on your tax return. For 2020, you can deduct up to $ 300 for charitable donations. This is above the standard deduction line. In 2021, joint filers will be able to deduct up to $ 600 for charitable donations.
# 11 COVID spending by teachers
For 2020, teachers can deduct hand sanitizer, masks, and cleaning supplies they purchased that were used in the classroom to protect against COVID19. Teachers can deduct up to $ 250 for expenses not reimbursed by the school.
# 12 Deposit early to maximize 3rd raise check
Even though Texans, due to winter storms, have until June 15 to file their taxes, experts say many will want to file their taxes earlier, especially if you need to be paid back or have a drop in income in 2020. A third potential stimulus check will likely be sent out in the middle of the tax season. To determine who qualifies for potential $ 1,400 checks, the IRS will likely use the latest tax return it has. If your income dropped last year due to the pandemic, you will soon want to file your 2020 tax return. That way the IRS will not rely on the higher income from 2019.
The IRS also expects more people to file taxes this year than ever before. As of Jan. 1, the IRS was still processing nearly 7 million paper tax returns from last year.