10 Things To Know About 2020 Income Taxes
From stimulus payments to a delayed deadline, this tax season is unusual to say the least. Our friends Herb Weisbaum and the editors of Puget Sound Consumers’ Checkbook consulted with tax pros to answer 10 common questions about your 2020 return.
Every tax filing season is different. While there are no significant tax law changes to worry about this time around, there are some issues related to the pandemic that could trip you up — or save you money.
1. When is my 2020 tax return due?
The IRS extended the tax deadline to May 17, 2021, for individual taxpayers, including people who pay self-employment taxes — but the agency is encouraging taxpayers to file as soon as possible, especially if you're expecting a refund.
You also have until the new deadline to make 2020 contributions to your individual retirement account (IRA) or until the three-year window closes on collecting any unclaimed refunds from your 2017 taxes.
The deadline for quarterly income tax filers is still April 15.
2. Do I owe taxes on my federal stimulus payments?
No. "The stimulus payments, formally known as 'Economic Impact Payments,' were technically an advance tax credit," said Matthew Frankel a certified financial planner who writes for The Motley Fool. "It's just like any other tax credit, except in this case, the government was giving out the money ahead of time, rather than at tax time. So, under no circumstances is that money taxable income."
More good news: Stimulus payments won't reduce any refund you might have coming, and they won't affect your reportable income when it comes to qualifying for federal government assistance or benefit programs.
If you qualified for the first two Economic Impact Payments but didn't get your money, or you received less than you should have, you can claim the payments as a Recovery Rebate Credit on your 2020 tax return. You must file a 2020 return to claim the Recovery Rebate Credit even if you are not required to file a tax return for 2020 based on your income.
The amounts of your first two stimulus checks were based on the taxable income reported on your 2018 or 2019 return, the only information the IRS had at the time. So, if your financial situation changed in 2020 — maybe your income dropped dramatically, you had a child, got married, or divorced — you may be entitled to more money, and you get that by claiming a Recovery Rebate Credit.
Frankel gave this example: "Let's say you and your spouse made $400,000 in 2019. In that case, you would not have qualified for any stimulus money. But if you lost your jobs and earned less than $150,000 in 2020, you did qualify for the full amount of both stimulus payments. So, in this scenario, you're owed a rebate of $3,600 or more, but you have to claim it on your return."
The third payment is not part of the 2020 Recovery Rebate Credit, so you won't claim that one on your 2020 tax return. You'll need to wait until 2021.
3. What about the unemployment compensation I received while I was out of work? Do I have to pay taxes on that?
Yes, but not as much as usual. To the IRS, jobless benefits are normally considered ordinary income, no different than if you got that money in your paycheck, but this is not a usual tax year.
According to recent changes to the American Rescue Plan, taxpayers, married filing jointly, who earned less than $150,000 don't have to pay income taxes on up to $20,400 of their 2020 unemployment benefits. Up to $10,200 is excluded for all other eligible taxpayers.
4. Are there any additional benefits for working families?
Yes. Changes to the earned income tax credit (EITC) mean families that earn less than $57,000 a year and have three or more children could get a credit of up to $6,600 on their 2020 taxes.
The law allows those who qualify to decide whether to use 2019 or 2020 earnings to calculate their credit. Those who were laid off or had their hours reduced in 2020 would qualify for a larger credit using their 2020 earnings than they would using their 2019 earnings.
And the EITC isn't just for people with kids: "A lot of low-income single taxpayers can claim the earned income tax credit," Frankel said.
To find out if you qualify for the EITC, use the IRS Qualification Assistant.
More info: The IRS has detailed information about the EITC on its website.
Filers also have the option to use their income from 2019 or 2020, whichever is more advantageous to them, when calculating the child tax credit.
Both the EITC and the child tax credit were further expanded for the 2021 tax year. The IRS will use families' 2020 earnings to calculate estimated child tax credits for 2021; those who are eligible to receive it will receive half their credits early as monthly payments from July to December. They'll get the other half when they file their 2021 returns.
More info: Kiplinger has a detailed FAQ about the Child Tax Credit. The IRS has a tool to help you determine if a child qualifies for the Child Tax Credit.
5. I worked from home for most of last year and spent a fair amount of money on office supplies, like paper and printer ink. I even bought a new headset. I paid for all this and did not get reimbursed from my company. Are these home-office expenses deductible?
No. The Tax Cuts and Jobs Act of 2017 eliminated home office deductions for regular employees (those who receive a W-2 form in January). So, if you're working for a company from home because of the pandemic, your only option is to ask to have those home office expenses reimbursed by your employer.
If you are self-employed (get 1099 income statements) and your house is your "principal place of business" — and you have a dedicated office that is not used for other purposes — you can deduct certain office expenses. Having a desk in the corner of the garage does not count.
For example, you can deduct all the paper and toner you buy for your home office printer, since it must be used exclusively for business. But you can only deduct a portion of what you pay for phone or internet access, if those services also are used for non-business purposes by you or other family members.
"The IRS lays out the calculations (for home office deductions) on its website, so I would definitely recommend looking at all those details," Palmer said. "Basically, you can deduct a portion of your mortgage or rent, a portion of your utilities, and other costs associated with your home office, but only if you're self-employed."
More info: IRS: The Home Office Deduction
6. I really need that refund. How can I get my money as quickly as possible?
The quickest way to get your refund is file electronically and have the funds direct deposited into your financial account. Do that, and, in most cases, your refund should be issued in less than 21 days, according to the IRS.
"Because the IRS is so far behind in terms of processing anything by paper, filing electronically this year is really the key," said Jack Wan, a certified public accountant in Maryland. "If you're dealing with any sort of complicated tax issues, expect a very long turnaround time."
Direct deposit is free, simple and secure. You can even split your refund to have it deposited into as many as three financial accounts, including a bank or IRA. Part of the refund can even be used to purchase up to $5,000 in U.S. Series I Savings Bonds.
With direct deposit, there's no check to get lost, stolen or returned to the IRS as undeliverable. It also saves taxpayer money. It costs more than $1 for every paper refund issued, but only a dime for each direct deposit, the IRS estimates.
7. Is it true that I can prepare my return and file it electronically for free?
Yes, if you qualify.
Anyone with an adjusted gross income (AGI) of $72,000 or less in 2020 can do their taxes for free through the IRS Free File Program, a partnership between the IRS and nine major tax software companies. You get free online preparation and filing of your federal return. There may be a fee for state returns.
The IRS Free File online look-up tool can help you quickly sort through the nine Free File offers to find the ones that best meet your needs.
Tip: It's best to use the Free File portal on the IRS website to compare Free File options. This is much safer than searching online for something like "file my taxes for free."
8. How do I track the status of my refund?
You can track your refund using the Where's My Refund? tool on the IRS website, or by downloading the IRS2Go mobile app.
The Where's My Refund? tool is updated daily, usually overnight, so there's no reason to check more than once per day or call the IRS to get information about a refund. You can check the page within 24 hours after the IRS has received your e-filed return or four weeks after mailing a paper return.
More info: IRS Bulletin on Direct Deposit
9. Did the rules change this year for charitable deductions?
Yes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted last spring, allows taxpayers who do not itemize to deduct up to $300 in cash donations made to qualifying charities last year. This deduction lowers both your adjusted gross income and taxable income, which will result in a tax savings.
Cash donations include those made by check, credit card or debit card. They do not include household items, property or securities. By law, you must have proof of a charitable deduction, such as a receipt or acknowledgement letter from the charity, a canceled check, or a credit card receipt.
10. I need some personal assistance, but can't afford to pay a professional? Is free help available?
Yes. Free tax preparation assistance is also available through these programs:
- The AARP Foundation Tax-Aide program provides in-person and remote tax assistance, with a special focus on taxpayers who are 50 and older, or who have low to moderate income. Tax-Aide volunteers are trained and IRS-certified every year to make sure they know about and understand the latest changes and additions to the tax code.
- The IRS Volunteer Income Tax Assistance (VITA) program offers free tax help to eligible people who make $57,000 or less, people with disabilities, and taxpayers who speak limited English.
- The IRS Tax Counseling for the Elderly (TCE) program offers free tax help for those who are 60 years and older, specializing in questions about pensions and retirement-related issues unique to seniors.
About Herb Weisbaum and Consumers' Checkbook
Consumers' Checkbook contributing editor Herb Weisbaum ("The ConsumerMan") is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. Puget Sound Consumers' Checkbook and Checkbook.org are a nonprofit organization with a mission to educate and help consumers. Checkbook also evaluates local service providers — home improvement contractors, doctors, dentists, veterinarians, stores and more. It is supported by consumers and takes no money from the companies it evaluates. BECU members can try Consumers' Checkbook for 30 days for free and can get 50% off their annual subscription.
This article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.