2020 has been an unprecedented year in many ways. People have been impacted in several ways; however, financial issues have remained a standout. Despite the government’s plan to bail people out with stimulus checks, the financial repercussions for many will be serious and lasting. Additionally, tax filing is also likely to be more complicated this year.
Don’t worry — we’re here to help you understand how coronavirus will likely impact your taxes this year and what you can do about it:
You don’t have to report anything as income on your tax return. However, do keep your Notice 1444 from the IRS for your records. If you did not receive your stimulus money or received less than you should have, simply claim the difference when you file your tax return. If you received MORE than you should have, you won’t have to pay it back!
Since a large percentage of Americans lost their jobs as a result of the pandemic, Americans are now claiming unemployment in record numbers. If you’ve never collected unemployment benefits, you might not know that this income is taxable on a federal and often also a state level in most cases. Your state will send you Form 1099-G to show you the benefits paid to you during the year, and this amount can then be reported. If you repaid some of this, you can reduce the benefits received by the respective amount. If you’re in Florida like us, your unemployment income will not be taxed!
Multiple jobs: A lot of people have faced a change in their work situation because of coronavirus. Some people have therefore taken on temporary or extra jobs. While this is great for cash flow, it does mean more complicated income tax withholding. Essentially, you have to strike a balance that suits you between taking home a bigger paycheck every month or potentially receiving a bigger tax refund.
Make sure you’ve completed your W-4 forms correctly to prevent unpleasant surprises at tax time. Complete new W-4 forms to update your withholdings.
Student Loan Relief
The CARES Act provided relief to many taxpayers with student loans by allowing them to either skip principal payments on certain loans without any adverse effects OR dropped interest rates for federally held loans to zero.
Since student loan interest payments enable taxpayers to take a student loan interest deduction, what this means is that if you paid less in interest, you’ll also have a smaller deduction amount. Since the January 31st expiration date is around the corner, make sure you’re ready to start making payments again!
Due to these tough times, the CARES Act enabled deductions for charitable giving even if you choose not to itemize deductions. Therefore, you can legally lower your taxable income with a deduction of up to $300 for cash given in charity.
If you DO itemize, this may be impacted too. The CARES Act increased the deduction limit from only 60% of your Adjusted Gross Income (AGI) to 100%. This is only applicable to cash donations, however. Make sure you have records for any cash donations!
Mortgage Payments or Foreclosure
If you had mortgage payments suspended or needed to foreclose on your home, you will need to prepare for tax consequences.
The CARES Act enabled borrowers who lost income and had federally-backed mortgages to delay payments by up to 180 days plus extensions of another 360 days. This also prevented a negative impact on credit scores for homeowners who lost their jobs.
However, real estate taxes may still be due. Missing this tax payment can be worrisome — the delinquent amount becomes a lien on your home. Ensure your tax preparer knows how to handle this situation. Otherwise, check with your mortgage services for more information.
Another thing to note is that if you paid lower interest rates, you’ll also get a smaller deduction. It may be better to opt for the standard deduction instead of itemizing.
Moreover, if your debt was cancelled due to home foreclosure, it might count as taxable income. In many instances, you can qualify for an exception and have the canceled debt excluded from your income however.
We hope that knowing about some of these changes and tax obligations help you better plan for tax time.
If you’re worried about how much your life, and therefore your taxes, have changed since last tax season — we’re here for you. You don’t have to figure out these complicated situations on your own.
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