Mark Steber, chief tax information officer says tax year 2020 will be complicated for the following reasons.
He says more Americans than ever have had life changes due to the COVID pandemic.
Near 60 million people filed for unemployment benefits. 40 million people may be self-employed full or part-time.
There were not one, but two sets stimulus payments and not one but two but even more tax law changes.
Near 60 people will be unemployed or were unemployed during 2020 at some point and filed for unemployment benefits. Steber says unemployment benefits are some of the most complicated tax rules in the tax code. Unemployment benefits are generally taxable which many taxpayers do not realize they go on your tax return. He says leave them off and the IRS may send you a nasty letter, an assessment and penalty interest. Unemployment benefits also do not automatically have tax withholding. Steber says you have to opt in as part of that program generally when you apply and most Americans did not and even if you do apply it’s generally only ten percent leaving many tax payers way short when tax time comes. There are tax law changes that help reflect that this year. As part of the last year-end bill they now said that unemployment benefits may reduce earned income and earned income tax credit for many tax payers and therefore they put in a new rule that said affected tax payers can look backward to 2019 and pick the bigger of their two years for their earned income credit.
The economic impact payments that have been made are not taxable.
Suppose you were laid off during the year or had hours changed or you income changed what might that mean to your taxes? You may qualify for new credits that you didn’t qualify for before because you were phased out in a prior high income. So, Steber says, if you had lower income or changed income you may look to the earned income credit, child tax credit, education credit to see if you now qualify. More importantly than anything if you had a lifestyle change and an income change, your taxes changed.
If you became self-employed this year because of a lay-off or sequestering or lower hours you may have a whole new set of tax return considerations because you are now self-employed. You may qualify for new deductions like a home office deduction.
Finally, what else do you need to know about the economic stimulus payment. They came in two bundles. He says if you did not get all your money you will reconcile that on your 2020 tax return as a recovery rebate credit and you’ll get caught up for tax law changes, for life changes or just other errors and other omissions by the IRS that you didn’t get the full amount of monies that you were due. So, if you didn’t get all of your money or all of your benefits or all of your deductions you will need to file a 2020 tax return to take advantage of all these things.