What the Pandemic Means for Your Taxes

Banknotes of the United States of America and a protective mask against the virus. World economic crisis associated with coronovirus.

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Banknotes of the United States of America and a protective mask against the virus. World economic crisis associated with coronovirus.
Sergii Zyskо/istockphoto

Taxing Questions

With two waves of stimulus checks issued by the government in response to the coronavirus outbreak, the upcoming tax season may be more confusing than past years, particularly for those wondering how stimulus payments might impact their tax returns. And that's not the only question emerging as filing season kicks off. Others include: Will there be a filing extension like last year? And is the IRS making any additional changes to accommodate the challenges brought about by the global pandemic? To help sort through at least some of the confusion, we asked experts to share insights about what the pandemic means for your 2020 tax returns. 

Related: 11 Situations Where It's Probably a Bad Idea to Do Your Own Taxes

CARES Act Stimulus Check

Stimulus Checks Will Be Part of Your Filing

For millions of Americans, stimulus checks were a much-needed infusion of cash. But it's important to be clear about what that money means for your 2020 tax filing. "The stimulus checks were an advance against a 2020 tax credit — both the check in the spring of 2020 and the check received in January 2021. Both are part of your 2020 taxes," says Richard Ogg of The Master's Tax & Financial Services. "The income is not taxable, but must be reported in order to calculate whether or not you are due any additional tax credit." 

Related: Why You Might Not Need a Tax Pro

United States Internal Revenue Service, IRS, Check and Corner of Envelope.

There Might Not Be a Penalty for Receiving Too Much Stimulus Money

Another note about those stimulus checks — otherwise known as Economic Impact Payments — and your tax credit calculations. A tax credit is an amount of money you're able to subtract from taxes owed to the government each year, directly lowering your annual tax bill. The amount of the annual credit you receive is based on such factors as how many children you have, whether you're a low-income earner, or a student or the  parent of a student whom you claim as a dependent. All of these factors impact your total annual tax credit amount. But what if, after all those calculations it turns out you received more in stimulus payments than you were eligible for via a tax credit? Will you have to pay the government back the difference? The answer is no. "If the advance payment you received exceeded the calculated credit, then you got a gift — no tax impact," says Ogg. 

Related: What to Do If the Government Wants Your Pandemic Money Back 

3.2 Million File Unemployment Claims As Economy Reels From COVID-19 Pandemic
Stephanie Keith / Stringer / Getty Images News / Getty Images North America

Increased Unemployment Benefits May Impact Your Return

The pandemic put millions of Americans out of work, and many promptly signed up for unemployment benefits. The CARES Act, which was signed into law on March 27, 2020, enhanced unemployment benefits by an additional $600 per week on top of the standard unemployment wages. The second stimulus package passed by Congress in December included $300 in enhanced unemployment benefits. All of this extra cash was certainly helpful for Americans. Unfortunately, however, many recipients fail to have tax withheld from unemployment benefits, which are taxable federally and in most states, as well. In other words, the income could have a substantial impact on your tax filing, says Ogg. "This could present a surprise once their tax return is completed," Ogg explains.

Related: 21 Ways to Cope With Long-Term Unemployment

Job layoff notice and application for unemployment insurance benefits paperwork.
JJ Gouin/istockphoto

What If You Did Not Withhold Taxes from Unemployment Benefits?

The answer to this question will vary by individual, says Ogg. "There are too many unknowns to predict, but it is likely to be ugly for a lot of people," he says. Key questions to review include: How much additional income from unemployment did you receive? How much income overall do you have annually? What is your filing status? How much withholding did you have from income coming from other sources? And did you make any estimated tax payments? From all of that, you can develop a rough idea of what the tax liability will be.

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New Form W-4

Incorrect W-4s Carry Risk

Many people lost income last year, leading them to seek gig economy jobs or multiple part-time jobs to make ends meet, says Jacob Dayan, CEO and co-founder of CommunityTax and Finance Pal. However, if they didn't properly adjust their withholdings on your W-4 to reflect the changes in their employment situation, they may end up owing the IRS more money than anticipated, says Dayan. 

Related: 30 Ways Your Tax Return Could Trigger an IRS Audit

Retirement Savings
Nattakorn Maneerat/istockphoto

A Break on Borrowing From Retirement

This year, taxpayers won't need to worry about paying the typical 10 percent tax penalty on early withdrawals from retirement accounts, thanks to pandemic-relief measures. The CARES Act allowed for coronavirus-related distributions or emergency withdrawals of up to $100,000 without penalty for those under age 59½. "However, you do need to repay the distributions," says Dayan of Community Tax. "You can choose to pay it back all at once, or you can spread it out — it just needs to be paid back by the 2022 tax return."      

Related: 9 Common Tax Mistakes Retirees Make

Calendar 2021 schedule with blank note for to do list on wooden desk

Filing Season Started Later This Year

Another point about the filing season this year to keep in mind — because tax season started later, opening on Feb. 12, you will have less time to prepare your return, says Dayan. "Tax season usually begins toward late January, but after the COVID-19 relief bill in December, the IRS needed additional time to prepare for all of the changes, including the most recent stimulus check," explains Dayan. 

Related: Too Busy to File a Tax Return? 12 Tips for Procrastinators

WFH - Work From Home
NoSystem images/istockphoto

Filing Extension … Not Likely

Last year, when the country was reeling from business closures, sudden shifts to remote operations, and countless layoffs, the IRS pushed the tax filing deadline from April 15 to July 15. This year, however much you may wish it would happen, an extension is highly unlikely. "There is currently no indication of an extension of the tax filing season. Last year was extended while many of us learned how to work remote. The IRS was effectively shut down for about three months," says Ogg of The Master's Tax & Financial Services. "The current expectations seem to be that by now everyone knows how to work remotely and we do not anticipate an extension to the filing season."   

Closeup woman filling form of Individual Income Tax Return,

You May Want to Time Your Tax Filing Carefully

While it has historically been good advice to be diligent about filing your taxes early in order to speed up your refund and mitigate potential identity theft, it may be wise for some individuals to delay filing this year, at least until after the third stimulus bill has been passed, suggests Eric Bronnenkant of the financial advisory company Betterment. Why consider delaying? It would provide a chance to assess any rules laid out in the next bill that might impact your return. Bronnenkant is not suggesting you skip the April 15 filing deadline, but merely that you might want to file later in the season to allow time for the new stimulus bill to be passed.

Related: These Tax Moves Are Most Likely to Trigger an Audit

Writing a donation check to a charitable organization

Don't Overlook the Charitable Deduction Benefit

One last temporary benefit from the various pandemic relief measures that have been passed is the addition of a tax deduction of as much as $300 for charitable cash contributions ($600 for married filing jointly). Filers can claim this deduction even if they do not itemize on their tax returns, which is a change from years past, says Ogg. But beware of taking advantage of this deduction fraudulently, adds Ogg. "Congress established a penalty of 50 percent for any false reporting on this deduction," says Ogg. "And note that the contribution must be made by cash, check, or credit card and normal substantiation is required."

Related: Crazy-Sounding Tax Deductions That Are Actually Legit