The COVID-19 pandemic upended 2020 in many ways, including your taxes. Are there any moves you should make now to save on your tax bill?
Your tax bill could change significantly if the coronavirus impacted your earnings this year. Taking action now can help you avoid unexpected penalties later on.
Here are 5 COVID tax moves that you should consider. They can save you money and help you avoid headaches down the road.
1. Check if you can get a stimulus payment credit
The CARES Act stimulus payment, recovery rebate or Economic Impact Payment is a tax credit rebate that decreases eligible taxpayers’ tax liability to compensate for losses due to COVID-19. Taxpayers who qualified received (or will receive) a $1,200 payment (single filers) or $2,400 (joint filers).
If your income fell in 2020
What happens if your adjusted gross income was too high in 2019 and you didn’t qualify to receive the stimulus, but then you became unemployed this year and your income fell enough for you to qualify? In that case, you’ll receive a $1,200 refundable tax credit on your 2020 tax return.
If the opposite happened, and you did qualify for the stimulus based on your 2019 income, but then found a better job and your earnings increased making you ineligible this year, don’t worry. You won’t have to pay the rebate back in your 2020 return.
Your dependents may qualify for a rebate
You can claim a $500 payment for each child if your adjusted gross income was below $75,000 ($150,000 for joint filers) based on your 2019 returns.
If your income fell this year and you now qualify for the stimulus, the credit should be reflected in your 2020 taxes. Also, you must claim your child as a dependent.
2. Track expenses if you’re newly self-employed
If you became self-employed due to the pandemic and have set up a home office as a result, keep track of your home office expenses. You’ll be able to reduce your tax bill by claiming a home office deduction.
This deduction, unfortunately, does not apply to employees working remotely due to the pandemic. As an employee, the home office deduction is considered a miscellaneous itemized deduction which the Tax Cut and Jobs Act eliminated for 2018 through 2025.
3. Don’t forget unemployment benefits may be taxable
As of July, more than 32.1 million Americans are receiving some form of unemployment benefits. If you’re receiving unemployment compensation, be mindful that you may owe taxes on these payments.
The following IRS tool can help you determine if your unemployment benefits are taxable.
4. Avoid plan distribution penalties
The CARES Act allows you to make penalty-free distributions from tax-exempt retirement plans up to $100,000 during 2020.
To qualify as an eligible coronavirus-related distribution, it needs to comply with the following guidelines:
- The distribution is made on or after January 1, 2020, and before December 31, 2020,
- You’re diagnosed with the virus SARS-CoV-2,
- Your spouse or dependent is diagnosed with such virus or disease,
- You experienced adverse financial consequences from being quarantined, furloughed, or laid off from work due to COVID
Ideally, you’ll want to tap your cash reserves from your emergency fund. But if you don’t have one and you need to make a withdrawal from your tax-exempt retirement funds, you’ll be able to do so without a penalty. Be mindful of additional tax consequences.
The withdrawals may be included in your taxable income over a three-year period, helping you even out the tax impact of such distributions.
5. Get a free withholding checkup
Get a free withholding checkup from the IRS. Why do it? Because a checkup can help you verify whether you’re withholding the right amount of tax from your paycheck. If you withhold too little, it could lead to unexpected additional taxes or penalties.
To use the tool, you’ll need your most recent:
- Pay stubs
- Income tax return
Checking your tax withholding can be useful especially if you ended up working only part of the year.
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