The IRS has started to accept federal tax returns for 2020. However, taxes are going to look very different for many people because of COVID-19. It might be more confusing than it already is if you took advantage of stimulus payments or provisions provided by the CARES Act.
Here are some of the main ways that your taxes could be affected:
1. Payroll Tax
So, any workers are going to see a pay cut this year as companies use the tax break authorized in the summer. Employers can stop withholding the payroll tax on employees until the end of the year. Workers are taxed 6.2% of their income because of Social Security and Medicare. This deferral will only affect people who earn up to $4,000 every two weeks, but less than $104,000 yearly.
You are usually taxed on the money earned in the state in which you live and work. However, with many people working from home, people are going to have to pay taxes to two jurisdictions. As a result, you could get an unexpected tax bill if you don’t tell your employer to withhold taxes for the appropriate states. Sixteen states have reciprocity agreements with other jurisdictions that let residents only pay taxes from one jurisdiction.
3. Refund of 529 funds
If you used funds from a 529 college savings plan to pay for housing and food, you will have to put the money back into the fund in order to not pay income tax with a 10% penalty. you only have 60 days from the time that you received the refund to give the money back to your 529 account without having to pay taxes and a penalty.
4. Home office deduction
You can’t take home a deduction from working at home even though you are required to work remotely because of the pandemic. If you are self-employed or are an independent contractor, you can still utilize the deduction.
5. Relief Checks
The money received from the government due to the pandemic is not taxable. That money is basically just an advanced payment on the Recovery Rebate Credit for 2020. People who didn’t receive payments can solve this when they file and if you were overpaid, you won’t owe because of that. In addition, if your income was too high at the time checks were sent out, but has since fallen, you might still be able to get the relief check.
There is a new temporary tax deduction if you make donations to charity. One can subtract up to $300 for money given to charity even if they take the standard deduction instead of itemizing deductions.
Lastly, the IRS is encouraging people to file their taxes online if possible as many people are not in the office. Taxes must be filed by April 15th, but if you can’t file your return on time, you can request an extension to October 15th.
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