We all know the year we just finished up. But many of us aren’t certain of some of the tax impacts we’ll see when we file our tax return. I will discuss a few of those.
Many taxpayers received an economic impact payment earlier in 2020 and many received a stimulus payment late December and in early 2021. Neither of these payments are considered taxable income. And neither will reduce your refund or increase your tax liability. But there may be some positive tax impacts for some.
Within the 2020 Federal tax return is a recovery rebate credit. You may be eligible to receive this, based on the information you enter on your 2020 tax return-if you didn’t receive some or all of the payments you are entitled to. So if you didn’t receive payments (economic impact payments or stimulus payments) prior to this, which were based on your 2018 or 2019 tax returns, you may receive payment through your tax return. But some taxpayers will get more good news.
If you added to your family in 2020, you may be able to capture payments. For example, if there was a birth of a new child, you’ll be eligible for more payment, using the same qualifications (income limits), as a recovery rebate credit. For those parents who alternate who claims a child from year to year, there can be an interesting outcome. If one parent received payments based on the 2018 or 2019 tax return and the other parent claims the child for 2020, the other parent will receive the recovery rebate credit, while the first parent keeps the economic impact payment and/or stimulus payment for the child. As long as the child is still under 17 at the end of 2020. Both parents can end up having received funds based on the child, one of them through the tax return.
Some adult children may also get the recovery rebate credit who were claimed as dependents in 2018 and 2019. I have two children who were my dependents those years, so they didn’t receive any of these payments last year or this year. But they supported themselves in 2020, so they’ll be filing tax returns and getting the recovery rebate credit. They should each receive $1800 under that credit.
Please note that if this information sparks some ideas about tax planning and strategies, ensure that you still follow the tax code regarding who can claim an individual and make sure all tax filings comply with the law.
The Federal provided unemployment assistance – the “extra” unemployment benefit – may cause some tax surprises for some individuals. Often people receiving unemployment don’t set any Federal withholding or don’t determine how much it really needs to be. This can be particularly a problem for any individuals who actually received more in unemployment income than they normally receive in earned income. In cases where this may be a concern, I encourage taxpayers to do projections now, in January to see if you need to develop a plan before you file your tax return.
Another item that affects most of us is that there is a new charitable contribution deduction for when people do not itemize. Everyone can take a deduction for charitable contributions. For 2020 you can deduct up to $300 ($150 if filing Married Filing Separate) from your income in money contributions to qualified charities. For tax year 2021 this increases to up to $600 for Married Filing Jointly filers. What this means for the 2020 tax return is that if your marginal tax rate is 12% and you gave $300 to a charity, you’ll get $36 in tax savings. Please note that contrary to popular belief, you are supposed to have and keep proof of charitable contributions when deducting them.
Those are just a few of the tax impacts of 2020. There were more, some that many already know about and others that were quietly tucked into legislation. Many people can handle the changes without a problem- but with all the abnormal stuff in 2020 – if your 2020 tax return seems too abnormal, it may be a good year to hire a tax professional if you don’t normally.
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Want to read more about Taxes?
- Learn why E-File may be your best friend this tax year: 2020 Taxes: 2 Warnings & 3 Resources to Help You File – Better Financial Counseling Network
- Taxes: Tips and Red Flags when Choosing a Professional (Coming Soon)