See how COVID-19 relief will affect the 2020 tax return you’ll file this spring.
In so many ways, 2020 was an unusual year. And taxes were no exception.
Due to COVID-19, Congress extended last year’s tax filing deadline by a few months. Lawmakers also passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Millions of Americans soon received stimulus checks, enhanced unemployment benefits, and penalty-free early distributions from retirement accounts. What’s more, many employees found themselves working from home for most of the year, raising the question if any of their work-related expenses were deductible.
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Now, as taxpayers prepare to file their 2020 returns, they may have some new questions about how these changes will affect them. Here are answers to tax questions that will likely crop up.
1. Will I owe taxes on the stimulus check I received last year?
No. The stimulus check, or the Economic Impact Payment, is an advanced payment of a federal tax credit designed to stimulate the economy. The money is not taxable income. And the cash won’t push you into a higher tax bracket or affect other federal benefits, such as Social Security or unemployment.
Congress authorized a second stimulus check of up to $600 for individuals, $1,200 for married joint filers, and $600 for each qualifying child. Find out if you qualify.
You should save the payment receipt the IRS mailed to you to enter into your tax software. This information is strictly used to ensure you have received the full amount to which you are entitled. It will not increase your taxable income or taxes due.
- Will the Covid-19 stimulus payments affect my tax refund? Get the answer to this question and more.
2. Can I claim the Recovery Rebate Credit on my 2020 return if I already received a stimulus check?
You can’t claim the Recovery Rebate Credit if you already received the full amount you are due in a stimulus payment last year. The maximum credit for the first payment was $1,200 per single adult ($2,400 for married couples), plus $500 for each qualifying dependent. The credit was reduced for higher-income households, dropping to $0 once Adjusted Gross Income (AGI) reached $99,000 for single filers and $198,000 for joint filers. Learn more here.
The maximum credit for the second payment was $600 per single adult ($1,200 for married couples), plus $600 for each qualifying dependent. The credit was again reduced for higher-income households, dropping to $0 once their AGI reached $87,000 for single filers and $174,000 for joint filers. For more information, read The 2nd Stimulus Check: How much and who gets it?
But if you received less than what you were entitled to, you can claim the additional portion of the credit on your 2020 return. For example, if you had a baby in 2020 after receiving your stimulus check, you would be eligible for the $500 dependent payment.
- TaxSlayer will automatically calculate the Recovery Rebate Credit if you qualify. Start for free today!
3. I worked from home for most of 2020. Can I deduct home office expenses on my tax return?
That depends. Traditional employees who receive a Form W-2 each year from their employer are out of luck. But you may be able to deduct your office expenses if you are self-employed, filing with a Form 1099, or a “statutory employee” — one whose tax status is a blend of traditional employee and a business owner. See four categories of workers who qualify as statutory employees.
But it takes more than just the right employment status to qualify for a home office deduction. The space must be used only for work on a regular basis. And most of your work must be done from the home office.
- Discover what counts as a home office and how to calculate the deduction.
4. Are unemployment benefits taxable?
Yes, Uncle Sam and most states consider unemployment compensation as taxable income. But you may avoid paying taxes on this money if your total income, including the benefits, was $12,400 or less in 2020 and you’re single and under the age of 65. (The limit is $24,800 for joint filers both under the age of 65.)
To avoid a surprise tax bill, you can request that taxes be withheld from unemployment benefits, or you can make estimated payments.
5. Are there tax breaks for the unemployed?
If you worked part of the year, you might qualify for the Earned Income Tax Credit (EITC) available to low-to moderate-income taxpayers. The credit amount depends on your filing status, income, and the number of qualifying children. The maximum credit for 2020 is $6,660.
If you paid for care for a child or other dependent while looking for work, you might be eligible for the Child and Dependent Care Credit worth up to 35% of the care costs, depending on your income. And you may also be eligible for a Child Tax Credit (CTC) of up to $2,000 for each qualifying child.
- Do I need to file a tax return if I’m unemployed? Get the answer to this question and more.
6. When will I get my tax refund?
The timing depends on how you file your return and if you elect to have your refund directly deposited into your bank account. For example, by filing electronically with TaxSlayer, your refund can be directly deposited into your account in one to three weeks after the IRS accepts your return. But you might have to wait up to two months if you mail in your return and want a paper check.
Be aware: Your refund can also be delayed if you claim certain tax breaks, such as the EITC or the Additional Child Tax Credit, that receive further review from the IRS. Track your fund with the IRS Where’s My Refund? tool.
- Use TaxSlayer’s Refund Calculator and see its estimated IRS refund delivery schedule.
7. I received a Form 1099-R even though I’m still working. Why?
Retirees are accustomed to getting a Form 1099-R that reports their distributions from retirement plans, but now many younger workers may be receiving this form. That’s because Congress allowed people affected by the coronavirus and under age 59 ½ to take early distributions from retirement plans in 2020 without paying a 10% penalty. They also can report the distributions over three years to spread out the tax bill.
- See the four kinds of 1099-R income you must report on your tax return.
8. Do I need to fill out the new Form W-4 if I already filled one out with my current employer?
No, but you might want to do so anyway. The IRS redesigned the Form W-4 last year so employers can more accurately calculate how much income tax they should withhold from workers’ paychecks.
Workers will likely notice that the new Form W-4 no longer asks about “allowances,” resulting from Congress eliminating personal exemptions in 2017. Instead, the form is a five-step process that asks about your income, if you have multiple jobs or a spouse who also works, the number of your dependents, and any deductions and credits you expect to claim on an itemized return.
If you look forward to getting a refund every year — basically a return of money you overpaid in taxes — the new form would seem to put an end to that. But don’t worry. The updated Form W-4 allows you to request extra money to be withheld — see Step 4 (c) — so you can still count on getting a refund.
Get started today by filing a simple federal or state income tax return for free with TaxSlayer Simply Free.
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