In 2020, the CARES Act was created as a response to all the economic upheaval caused by COVID-19. The CARES Act sought to provide economic support to millions of Americans. This support extended to the way taxes are filed and processed for 2020, creating additional benefits depending on your particular circumstances. Read on to learn how the events that took place in 2020 could affect your taxes.
Stimulus Checks & Tax Credits
Stimulus checks were distributed to millions of Americans during 2020 and early 2021. These Economic Impact Payments or Recovery Rebate Credit as they were called gave Americans an extra $1,200 followed by an additional $600. According to the IRS, if you were eligible to receive the payments but did not, you may be able to deduct them from your 2020 taxes.1 There are just a few requirements you must meet before filing for this reduction.
- Be a U.S. citizen or resident alien during 2020
- Must not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
CARES Act & Retirement Accounts
The CARES Act allowed individuals with a 401(k), 403(b), 457(b) or Thrift Savings Plan to make a withdrawal without incurring the standard 10% penalty you would normally pay for taking an early distribution.2 Instead, these withdrawals were considered coronavirus-related distributions and not subject to the 10% penalty.
If your financial situation caused you to need to take a withdrawal during 2020, your taxes may be impacted in a few ways:2
- They will count as income tax over a three- or one-year period, depending on your choice.
- They can be repaid before the end of the three-year period to receive a tax refund.
Charitable Gift Deductions
Typically, charitable deductions are a great source of tax relief for filers who are able to use them. In 2020, the CARES Act provided some changes to charitable donations for taxpayers who take a standard deduction. This change allowed these filers to benefit from charitable donations as well. Tax filers taking a standard deduction may now deduct $300 of cash donations on top of their standard deduction.3
For the many people that lost their jobs during the COVID-19 economic turmoil, there are a variety of unemployment options. All unemployment benefits are considered taxable income for 2020, but whether they are taxed will depend entirely on the type of program.4 To determine whether or not you will need to pay taxes on the unemployment income you received, check with your benefits provider.
2020 was an incredibly challenging year, and understanding the help that’s available to you can benefit your own financial well-being this tax season. Whether you’re filing your taxes soon or just beginning to look for all your papers, remember to consider these potentially impactful changes.