When it comes to COVID-19, there’s no better word to describe it: unprecedented. The pandemic has affected our habits, healthcare, and community like never before, and it has also affected our finances. Many people have lost a job. Some have chosen to withdraw money early from investment or retirement accounts, in order to make ends meet. Most households have also made use of stimulus checks from the government.
With so many out-of-the-ordinary financial occurrences in 2020, filing your taxes might look a little different this year. With tax deadlines fast approaching, here are a few points to keep in mind as you start to prepare your 2020 taxes amidst an ongoing COVID-19 pandemic.
- Stimulus Checks: By now, many Americans have received a first and even a second stimulus check from the federal government. If you haven’t received one or both of these checks and should have, you can claim that money as a recovery rebate credit on your tax form – which basically means that the government will be notified that you’re missing money and work as fast as possible to get you whatever funds are owed. You can expect this money to come in the form of a higher tax refund or a credit to offset how much you owe in taxes.
If you have received your stimulus checks, the good news is that they aren’t considered taxable income. You won’t be bumped up to a higher income bracket, or be obligated to pay more taxes, due to receiving a stimulus payment.
- Unemployment Benefits: Do you need to pay taxes on unemployment benefits? The short answer is: yes. Money you receive from the government due to being unemployed is considered taxable income. How much you owe depends on your income bracket and your state, but it’s likely to be around 12-25%.
Nobody likes getting hit with an unexpected tax bill, so if you’re concerned about the tax you’ll owe on unemployment benefits, start looking into what tax credits you’re due – such as the earned income tax credit, child and dependent care tax credit, and so on. These can help to offset the financial burden. Moreover, if you expect to continue receiving unemployment benefits in 2021, consider applying for automatic tax withholdings to lessen a sudden financial shock at the end of the tax year. Both state and federal departments have the option to withhold some income tax from weekly unemployment benefits.
- Withdrawals from Retirement Accounts: Under normal circumstances, tapping into a traditional retirement account – such as your 401(k) or IRA – before age 59½ requires you to pay a 10% early withdrawal tax penalty. However, in 2020 the federal government changed this rule to allow for withdrawals of up to $100,000 from employer-sponsored retirement accounts, without the penalty. It’s a tax benefit that’s technically limited to individuals who can prove that they or a member of their household have been negatively affected by the COVID-19 pandemic; although in practice, most people qualify.
The rule change means you’re off the hook for this tax year – but do be aware that retirement withdrawals under this policy must be paid back within three years. Any funds not paid back into your retirement account will be subject to the original 10% early withdrawal tax. Ultimately, you always want to be saving as much money as possible in a tax-advantaged way; so aim to pay back funds into your retirement account as soon as you can.
Looking for more information about filing taxes, tax returns, and what’s changed since 2020 and the COVID-19 pandemic? Check out irs.gov for FAQs and key facts, and chat with a tax professional if you need further support on preparing your taxes.