Many Americans are feeling the impact of the COVID-19 pandemic on their everyday lives. But thanks to the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act, you might see some relief when you file your 2020 taxes (taxes filed in 2021), in some cases, even earlier.
We break down the major changes that could impact your 2020 tax return.
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In April 2020, the IRS started sending out Economic Impact Payments (commonly referred to as stimulus payments or recovery rebates). Taxpayers could receive up to $1,200 per adult ($2,400 for a married couple) and an additional $500 for each dependent child, but the payments were phased out for taxpayers with higher incomes. The IRS used your 2018 or 2019 tax return to calculate the amount.
Technically, the payments were an advance on a 2020 tax credit, so they can affect your 2020 tax return. But don’t worry — receiving one won’t increase your 2020 tax bill or decrease your refund.
If your income was lower in 2020 than it was on your prior-year return, you could be eligible for a higher stimulus payment once you file your 2020 tax return. However, if your 2020 income was higher than what was used to determine your rebate amount, you won’t be forced to pay back the stimulus money or lose any of your refund. Any adjustment to the stimulus payment on your 2020 tax return will be in your favor.
It was a little easier to withdraw money from your retirement account if you were out of work or needed cash in 2020. Normally, if you withdraw money from your IRA, 401(k) or other employer-sponsored retirement account before the age of 59½, you must pay an early withdrawal penalty.
The CARES Act temporarily waived the 10% early withdrawal penalty on up to $100,000 of withdrawals. To qualify, you had to have been diagnosed with COVID-19 or experienced financial troubles due to the pandemic, such as job loss, quarantine, furlough, reduction in hours, the closing of your business or lack of childcare.
Although the CARES Act waived the 10% penalty, the withdrawals are still taxable as ordinary income. You can spread the taxable income over a three-year period or include the full distribution in your taxable income for 2020. You can also put the money back into your retirement plan within three years and undo the tax consequences by filing an amended tax return.
If you took a retirement account withdrawal in 2020, look for Form 1099-R from your financial institution around the end of January 2021. You’ll need to report the amounts shown on 1099-R when you prepare your 2020 tax return.
The stimulus bills didn’t make any significant changes to the standard deductions available on 2020 tax returns, but the amounts available for 2020 did increase slightly for inflation.
For most single taxpayers and married couples who file separately, the standard deduction is $12,400. For most married taxpayers filing joint returns, it’s $24,800 and $18,650 for the head of household filers.
While the stimulus bills didn’t make any changes to medical expense deductions, if you or your dependents had any out-of-pocket medical expenses in 2020, you may be able to deduct them on your tax return. Just make sure you save those receipts.
You can deduct qualified medical expenses greater than 7.5% of your adjusted gross income (line 11 on Form 1040) on your 2020 taxes. For example, if your adjusted gross income is $50,000, anything beyond the first $3,750 of medical bills could be deductible.
To benefit from deducting medical expenses, you need to itemize instead of claiming the standard deduction.
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The CARES Act also expanded deductions for charitable contributions — whether you itemize or not. For 2020, itemizers can deduct charitable contributions up to 100% of their adjusted gross income. Previously, the cap was 60% of adjusted gross income for most cash donations.
If you don’t itemize, you can take up to $300 in charitable cash donations as an “above-the-line” deduction, which reduces your adjusted gross income.
Estimated tax payments
Self-employed taxpayers and those who don’t have enough taxes withheld typically need to make quarterly estimated tax payments, paid in four installments due in April, June, September and January.
For the 2020 tax year, you had more time to make those first- and second-quarter estimates. That means the installments that would typically be due on April 15 and June 15 were pushed back to July 15, 2020. As long as you made your required estimated payments by that date, you won’t get hit with an underpayment penalty. The third-quarter estimate was still due September 15, 2020, and you have until January 15, 2021 to make your fourth-quarter estimated payment.
Required minimum distributions
Taxpayers usually must take withdrawals from their retirement accounts each year after age 72. However, the CARES Act allowed taxpayers to skip their 2020 required minimum distributions (RMDs). These distributions are typically taxed as ordinary income, so postponing your retirement account withdrawals until 2021 could reduce your 2020 tax bill.
If you’ve already taken your required minimum distributions for 2020 and don’t need the money, you have 60 days to roll it over into an IRA or workplace retirement account. Just keep in mind you can only make a rollover once every 12 months.
Self-employed tax relief
The FFCRA and the CARES Act created several new tax credits for self-employed taxpayers.
The FFCRA provides refundable tax credits worth:
- Up to $511 per day (for up to 10 days) if you took time off because you were quarantined due to COVID-19 or experiencing COVID-19 symptoms.
- Up to $200 per day (for up to 10 days) if you took time off to care for someone else impacted by COVID-19.
- Up to $200 per day (for up to 10 weeks) if you took time off to care for a dependent child whose school or child care provider was closed due to COVID-19.
You don’t have to wait until you file your 2020 tax return to take advantage of these credits. You can estimate your available credit using the Tax Credit Estimator available in our Self-Employed Coronavirus Relief Center and use the result to reduce your estimated tax payments for 2020.
The CARES Act also allows self-employed taxpayers to defer 50% of the Social Security portion of self-employment tax for March 27 through December 31, 2020. This is a deferral, not forgiveness, so those amounts will eventually have to be repaid. Half of the deferred amount is due on December 31, 2021, and the other half is due December 31, 2022. You can estimate your deferral amount using the Tax Credit Estimator.
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