The COVID-19 pandemic has caused many financial issues — but how has it affected taxes?
Many of the efforts that the federal government has put forth to ease the economic impacts of the pandemic have also resulted in some key changes regarding the tax obligations of individuals and businesses.
These include, but are not limited to changes affecting filing deadlines, retirement accounts, and charitable deductions.
The most significant changes fall into three (3) main categories:
- Changing deadlines
- Retirement deposits and disbursements
You are certainly already aware of the most obvious change regarding COVID-19 and income taxes. The usual April 15 filing deadline, and date for paying 2019 taxes, was delayed from April 15 to July 15, 2020.
If you had filed your taxes in late February, before the coronavirus significantly impacted the economy — as many taxpayers did — you were unaffected by the new deadline. For others, the delay offered more time to get records in order and make payments.
Estimated payments for the first and second quarters of 2019 also were delayed until mid-July.
Automatic extensions, taking the 2019 filing deadline to Oct. 15, can be made by submitting Form 4868 with the Internal Revenue Service, but tax payments for last year still had to be submitted by July 15.
One new rule for people taking the standard deduction is that they will be able to deduct up to $300 worth of cash contributions to charities — starting for 2020.
Also, the basic standard deduction amount rises to $12,400 for singles and $24,800 for married couples filing jointly in 2020. Those figures are up to $200 and $400, respectively, from 2019.
For those who are itemizing deductions, medical deductions will remain a bit easier to claim.
This deduction was supposed to change to a 10% threshold, but due to COVID-19, it remains at the easier to attain a 7.5% threshold for 2019 and 2020.
Recent legislation has changed several key provisions regarding taxation of early disbursements from retirement accounts, at least temporarily.
Before, the general rule was that permanent withdrawals from traditional IRAs or 401(k) accounts faced taxation at ordinary-income rates. Investors pulling out money before age 59 1/2 would also typically face a 10% penalty.
You now can avoid that 10% penalty (if under 59 1/2) on up to $100,000 in coronavirus-related withdrawals from a retirement account. Another temporary change allows you to spread coronavirus-related distributions (which cover a lengthy list of circumstances) over three years, reducing the tax impact.
Also, the IRS has decided that any investors older than 72, who already took a required minimum distribution, or RMD, this year from certain retirement accounts, can roll the money back into the same or similar accounts.
Doing so could lower a person’s current tax bill and allow them to rebuild their investment portfolios, since, usually, RMDs are normally taxable.
How Do I Account for Stimulus Payments?
Another question many people have right now is how to account for any stimulus payment on your 2020 return. Is the stimulus check considered income?
The first round of Economic Impact Payments (EIPs) or “stimulus checks” were cleared for release in early April 2020. Most if not all individuals and households that qualified for EIPs, has already received them by now. Congress is in negotiations for the second round of stimulus, but that has not yet been approved.
The way the CARES Act, which allowed for the EIPs, was written, payments are considered as an advance of tax credit given to everyone for 2020. As a tax credit, that money is not considered taxable income. You won’t have to pay income tax on the stimulus money. However, understand, that does not apply to any unemployment benefits you may have received in 2019. Unemployment payments are still considered taxable income, so be sure to check that the amount of taxes withheld from your unemployment checks covers your tax obligation.