Covid-19 and Individual Income Taxes

Covid-19 has affected virtually every aspect of our lives this year. Next year it will probably impact your taxes. Everyone’s tax situation is different, and what may be true for one person does not necessarily hold true for another. However, at this time we do know of several provisions in the Coronavirus Aid Relief & Economic Security (CARES) Act that will affect a majority of taxpayers.

Stimulus Payments – Did you receive one? How much? This information will likely need to be entered on your 2020 tax return. The payment is not taxable, it’s an advance on a credit that will appear on your return. If you received a payment but don’t qualify for it on your 2020 return, don’t worry, you won’t have to pay it back. But if you didn’t receive a payment, or less than the full payment, and you qualify based on your 2020 tax return information, you will receive the credit on your return.

Unemployment benefits – A record number of people filed for unemployment this year. While it’s much needed income, it can create a nasty surprise at tax time. Unemployment benefits, Pandemic Unemployment Assistance (PUA) payments, and the $600 additional weekly amount are all taxable income. Whether or not this increases your tax liability will depend upon your overall tax situation. If you are receiving benefits and are concerned about an increased tax bill next year, you can request that the state withhold federal and/or state taxes from your payment.

Charitable Contributions – In prior years you had to choose to itemize your deductions in order to deduct charitable contributions. Those who were better served by taking the standard deduction were not able to take the deduct charitable donations. For 2020, the CARES Act allows you to deduct charitable donations of up to $300 even if you use the standard deduction. Donations still must be made to a qualified nonprofit organization to qualify.

Retirement Account Withdrawals – Previously, there was a penalty of 10% on withdrawals from retirement accounts made before you turned 59 ½. This was in addition to the income tax owed on the withdrawal itself. The CARES Act has removed the 10% penalty and allows you to spread out the tax liability on withdrawals over three years. For simplicity, let’s say you withdrew $3,000. Under this provision you could choose to pay taxes on $1,000 of the withdrawal on 2020’s tax return, taxes on another $1,000 on 2021’s return, and tax on the remaining $1,000 on your 2022 return.

There is also an incentive to put the money back into your retirement accounts when the need has passed. It’s not required, but if you choose to pay back some or all of the money you withdrew, and do so within the next three years, you can file an amended 2020 tax return and treat the returned portion of the distribution as if it never happened, potentially receiving a refund.

Required Minimum Distributions – Prior to the Tax Cuts and Jobs Act (TCJA) passed in 2017, taxpayers with qualified retirement plans and traditional IRA’s were required to take required minimum distributions (RMD) in the year that they turned 70 ½. TCJA raised the age to 72 for taxpayers who had not yet been required to take distributions. Under the CARES Act, RMD’s for 2020 are no longer required for anyone. It is unclear at this time whether a taxpayer will be allowed to reverse a RMD already received this year.

Possible Future Deduction for Unreimbursed Employee Expenses – Congress may change or pass new laws at any time, and often does so to address current economic conditions. This year there has been an explosion in the number of employees working from home. Many of these employees incurred expenses that were not reimbursed by their employer such as laptops, monitors, and headsets. Before TCJA these expenses could be deducted when itemizing, but the deduction was hard to take and the deduction was eliminated. While there is currently no indication that any of the impending legislation includes provisions to address this issue, it is always a good idea to keep your receipts to ensure you have adequate documentation to justify any possible credits and deductions.

Individual situations will vary, and this article is for general informational purposes only. If you have questions about how any of these provisions will affect you personally, please contact your tax professional.