The CARES Act, a direct response to the economic turmoil caused by COVID-19, sought to provide economic support to millions of Americans. This support extended to the way taxes are filed and processed for 2020, creating additional benefits depending on your circumstances. Read on to learn five ways the events that took place in 2020 could affect your taxes.
Impact #1: Stimulus Checks & Tax Credits
Millions of Americans received stimulus checks during 2020 and early 2021 - the first for $1,200 and the second for $600. These stimulus checks were also referred to as Economic Impact Payments or Recovery Rebate Credit. According to the IRS, if you did not receive these payments (and were eligible to do so) then you may be able to deduct them from your 2020 taxes.1 There are a few requirements you must meet before filing for this reduction.
- Be a U.S. citizen or resident alien during 2020
- Must not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
Impact #2: CARES Act & Retirement Accounts
The CARES Act allowed individuals with a 401(k), 403(b), 457(b) and Thrift Savings Plan to withdraw their funds without incurring the standard 10 percent tax rate from an early distribution.2 Instead, these withdrawals were considered coronavirus-related distributions.
If you chose to take a withdrawal during 2020, your taxes may be impacted in a few ways:2
- They will count as income tax over a three- or one-year period, depending on your choice.
- They can be repaid before the end of the three-year period to receive a tax refund.
Impact #3: Charitable Gift Deductions
Charitable deductions are often a great source of tax relief for filers. In 2020, the CARES Act provided some changes to charitable donations, allowing filers who take a standard deduction to benefit from charitable donations as well. Tax filers taking a standard deduction may now deduct $300 of cash donations on top of their standard deduction.3
Impact #4: Unemployment Benefits
There are a variety of unemployment options for those that lost their jobs. All unemployment benefits are considered taxable income for 2020, but whether they are taxed will depend entirely on the type of program.4 Make sure to check with your unemployment benefits provider to determine whether or not you will need to pay taxes on your unemployment.
Impact #5: Tax Benefits for Business Owners
Business owners received two main benefits through the CARES Act, the Credit for Sick and Family Leave and the Employee Retention Credit.5 When filing taxes at the end of the year, consider whether the year’s changes allow you to benefit from other tax breaks beyond the CARES Act.
For example, many small business owners may have been forced to close down their physical location, opting for more remote work. Depending on the circumstances, these business owners may be able to claim their home as a home office, gaining a home office deduction on their 2020 taxes. Similarly, consider whether the changes created by 2020 make you eligible for other deductions and tax changes.
2020 was a challenging year, and understanding the support that’s available can help promote your own financial wellbeing this tax season. Whether you’re filing your taxes soon or still gathering your papers, remember to consider these potentially impactful changes.
To speak with one of our Minneapolis-based financial advisors, you can book an appointment at https://bookwithsfg.timetap.com/, give us a call at 612-492-0212 or send us an email at email@example.com. We are always happy to help in any way we can.