How COVID-19 Might Impact Your Taxes
It’s been nearly a year since COVID-19 entered our lives, and since then the pandemic has affected nearly every part of life for most people in the U.S. and around the world. It is no surprise that COVID-19 will have an impact on 2020 taxes for many people. At the time this article was written, the tax filing deadline has not been extended and barring any extensions, the deadline for filing is April 15th, 2021. Here are some things to be aware of for those filing their taxes in the next few months.
For IRA owners over age 72 and Inherited IRA owners, required minimum distributions (RMDs) were waived in March of 2020. Some individuals had already taken their RMD prior to that time, so they could roll some or all the distribution back into their IRA prior to August 31, 2020. For anyone in this situation, a 1099-R will be issued for the distribution that occurred, even though it was returned. On line 4a of the Form 1040, filers will report the total amount of distribution as reported on the 1099-R. On line 4b, which asks what the taxable amount is, $0 should be entered for anyone who returned the full amount of their distribution, and “Rollover” should be written next to that line. If an individual returned only part of their distribution, the amount that was not returned should be entered on line 4b. In addition, anyone who completed a rollover back into their IRA or Inherited IRA will receive a Form 5498, which will indicate the amount returned. This form, which is usually released in May, is for taxpayer records only, and does not get filed with the tax return.
Many individuals began working remotely last year. What some new work-from-home employees might not realize is that telework could potentially cause them to owe state taxes in multiple states. Most people will not be impacted by taxation in multiple states. However, if you worked remotely in a different state than where you typically would have worked had you been in the office, it is worth consulting with a tax professional to make sure you are paying tax to the appropriate jurisdictions. Unfortunately for those working from home, a home office deduction is not an option unless you are self-employed or an independent contractor.
If you are among the 85% of tax filers who use the standard deduction, you may not be used to receiving a deduction for charitable donations. However, in 2020, filers using the standard deduction will be allowed to deduct up to $300 in cash donations.
The stimulus payments that were sent out in two separate installments in 2020 were considered advance tax credits and are not taxable. Eligibility for stimulus payments was determined based on the information from 2019 or 2018 tax returns, so some households may not have been eligible based on 2019/2018 information, but due to a change in their situation, they may have been eligible in 2020. This also affects families who had children in tax year 2020. For those impacted, the credit for the stimulus will be factored in when you file your taxes showing that your situation in 2020 qualified you to receive stimulus. In addition, for anyone who was eligible for the stimulus based on 2019/2018 information but was not eligible as of 2020, they will not be required to return the stimulus they received.
Please consult your tax professional for information on how the CARES Act and other tax legislation related to COVID-19 may impact your situation specifically.