All Your Questions About Your 2020 Taxes, Answered
Tax season 2021 starts February 12, and you probably have more than a few questions.
The year 2020 threw all manner of curveballs at Americans, but among the many concerns we faced last year were those surrounding money—and taxes. Last year, filing deadlines for 2019 taxes were extended, and families who were hard-up for cash after spring layoffs had to wait for word on what their second stimulus checks would total based on their 2019 tax filings in 2020. And, in the midst of all of that, we had warnings from accountants that much of what we wondered about in 2020 wouldn't be solved until we filed for taxes in 2021.
Now tax season 2021 is here and people are asking: How will the pandemic affect our taxes this year? We've asked experts for the answers to six of your most pressing tax questions ahead of this year's tax season and Tax Day.
The answer to this most commonly asked question is no: Your stimulus checks are not considered taxable income. You will not have to account for those checks when you file this year. That’s true whether you received one or two checks and whether your checks also included your dependents (aka your children).
“Your stimulus check is considered to be an ‘Economic Impact Payment’ by the IRS and does not count towards your income,” says Lauren Anastasio, a certified financial planner with the personal finance company SoFi. “So not only will you not owe taxes on any payment you received, it will also not count towards your taxable income.”
That also means your past stimulus checks cannot bump you up into a higher tax bracket and therefore won’t affect any tax deductions you typically file for this year, Anastasio says. If you’re waiting to see what a third stimulus check might look like for you, your past two checks will not affect your tax bracket or what you receive for the third check. Unlike nearly all other forms of income you likely brought in this year, those stimulus checks truly came with no strings attached.
A recent H&R Block survey showed that, while the number one concern among tax filers this year was whether they would be taxed on their stimulus checks, it was quickly followed by folks wondering about filing deadlines and unemployment.
Here’s where many Americans are in for a rude awakening. While stimulus checks aren't considered taxable income, unemployment is. So even though the government has increased the typical weekly unemployment payments in an effort to help people stay afloat financially while unemployed, you’ll still owe taxes on any unemployment benefits you received.
“Unemployment benefits are always taxable, but taxes are not withheld at the same rate they would typically be out of your paycheck—the idea being that you need the money more when you’re actively unemployed,” Anastasio says. “Whenever too little in taxes is withheld, however, it means that taxes will likely be owed when you file. Since unemployment recipients received higher benefit amounts under the CARES Act, they can expect that they will owe more in taxes than they would have if they hadn’t received the extra payment each week.”
This information was key last year, when many families received and promptly spent their checks to try to cover the necessities. You’re going to owe the IRS taxes on that money this year, even if you weren’t setting some of that money aside as you received it.
“What will likely happen in millions of cases is that people who never paid tax before and weren’t planning on paying taxes this year will likely owe taxes,” says Mike Savage, CEO of 1-800Accountant.
If you’re still receiving unemployment benefits from the federal level as a result of the pandemic, or another reason, you’ll want to start making estimated tax payments on a quarterly basis or plan to set aside about a quarter of your weekly payments in the event that you owe money at the end of the year.
Maybe, maybe not. So far, the deadline for filing taxes this year is April 15, per usual. However, things are already off to a bit of a late start with a February 12 opening day for tax filing.
Savage says the date seems to get later each year. This year, the IRS says the later opening day will allow them to test their systems and implement December tax changes affecting the second round of Economic Impact Statements.
With so much still in flux this year, Savage generally recommends filing by the deadline. There's no real advantage to filing super early this year, unless you desperately need your return sooner or are concerned about tax return fraud. Otherwise, you could benefit from waiting until the deadline so you can adjust your plan should any other disaster strike between now and Tax Day.
“In a world of uncertainty, wait. That’s my advice,” Savage says.
It’s still possible that the IRS could delay filings this year, though it’s not likely. Last year’s delay had to do with the fact that many accountants had to suddenly shift to remote filings and IRS workers weren’t in offices to begin processing returns, but hopefully many of those logistical challenges have been resolved this year.
If you find you need an extension this year, you can file for one before April 15 and delay your filing date to July or October depending on your needs. That’s an option available to you always, pandemic or no pandemic.
“There’s a lot of talk about a third round of stimulus checks, which would either be based off of your 2019 or 2020 tax filings,” Savage says. “So there could be a mad rush of people filing their taxes immediately to affect their third stimulus check.”
If you earned less in 2020 than you reported in your 2019 filing, for example, you could end up getting a higher stimulus check if you file early. And if you want your return sooner, Kimberly Palmer, personal finance expert with Nerdwallet, suggests filing electronically to shorten turnaround time.
“This year, that is more important than ever, because we’ve seen that the postal service is still facing some delays,” she says.
Business closures around the country brought society to a screeching halt last spring and many entrepreneurs and business-owners had to take out loans to make ends meet. Contract and freelance employees were also given the opportunity to take out a loan this year. Most of the business loans are forgivable if you can prove you used them on payroll, Savage says.
But the mere fact that you took one out will likely mean the IRS pays closer attention to your filings this year.
“You’re going to have to prove the backup [for] all your expenses,” Savage says. “Be prepared to be audited.”
Be sure you have receipts for how you spent the money and why you needed it in the first place. You’ll want to have those documents handy should the IRS request once you file.
If you took advantage of the economic relief measure and deferred payment on your college loans, don’t sweat it. You won’t be penalized, and you won’t really have to consider this when filing. You’ll likely just report less interest on your 1098-E form when you go to file, Palmer says.
“You can deduct up to $2,500 a year in student loan interest,” she says. Last year’s pause on federal student loan payments and interest accumulation may have lowered the amount you’ll deduct, but it’s unlikely to have a huge impact on your taxes.
The same goes for a mortgage payment. Millions of Americans worried they’d be unable to pay for housing this year, prompting Congress to defer payments on federal housing loans. While you’ll still owe back payments on these loans, you won’t have to worry about seeing a tax consequence. Like college loans, you’ll wind up reporting that you paid less interest on these loans for the year 2020.
If, after filing, you realize you owe taxes this year but can’t pay immediately, you can ask the IRS for a payment plan. Payment plans are available every year, and the IRS has not so far announced changes to those accommodations this year.
“The IRS offers different types of installment plans, and it depends on how much you owe in terms of what kind of installment is available to you,” Palmer says.
The short answer is no. There are no new deductions for that office chair you bought yourself when your boss sent you home in March, and you can’t report what you spent on WiFi for your business Zoom meetings or your children’s homeschooling in your taxes. While many parents and workers waited for news of these kinds of deductions, they have not come.
Standard deductions are still available for folks who work from home in a normal situation and not as a result of lock-down orders, though, Palmer says.
If you’re overwhelmed by the changes this year or wondering how to best prepare your filing, your best bet will always be to hire a pro.
“It depends on how complicated your personal situation is,” Palmer says. “If you’re feeling overwhelmed and have some unique issues—maybe you moved states or changed employers—it can make things more complicated and you might want some professional help.”
Anastasio says, if you’re stressed about making sure you get everything right, look to see if the IRS has a Volunteer Income Tax Assistant (VITA) program near you. They will offer free tax help for taxpayers who qualify.