Haven’t Filed Your Taxes Yet? Be Aware of These Features
As if the pandemic hasn’t already affected every other aspect of people’s lives, now there’s taxes. But in this case, the effect is positive. The different relief packages passed over the last year offer a host of features that can help taxpayers lower their 2020 tax bill. And if you are among the many who are filing your return later due to the extended filing deadline, you still have time to take advantage of these features.
So, as you sit down to prepare your tax return, keep in mind the following.
Stimulus checks aren’t taxable.
The millions of Americans who received stimulus checks in 2020 will not have to report it or pay taxes on it. If, for some reason, you were owed one but didn’t get it, or you did not receive the full amount that you were entitled to, you can get it in the form of a Recovery Rebate Credit when you file.
Unemployment benefits may not be taxable.
The latest relief package, the American Rescue Plan Act of 2021 (ARPA), passed in March, made the first $10,200 of unemployment benefits received by an individual taxpayer (or in the case of a joint return, received by each spouse) in 2020 tax free if your annual household income is under $150,000. For those who already filed their taxes and reported unemployment benefits before passage of the ARPA, the IRS will automatically recalculate the correct amount of taxable unemployment and refund any resulting tax overpayment (or apply it to other outstanding taxes owed).
Paycheck Protection Program (PPP) loan proceeds may be tax deductible.
For those businesses that received loans under the PPP, eligible expenses that were paid with loan proceeds may be deducted from taxable income. Keep in mind, however, that under the program, any loan forgiveness is subject to the approval of the Small Business Administration.
Those claiming the standard deduction still may be able to deduct $300 for charitable contributions.
In an effort to help charities hard-hit by the pandemic, the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in cash donations made in 2020. Usually, only those who itemize can write off donations to charity.
No penalties for early withdrawals from your retirement plan.
Normally, if you are under age 59½ and withdraw money from your qualified retirement plan — such as a 401(k) or IRA — you must pay a 10% early withdrawal tax and ordinary income tax on taxable portions of the distribution. But the CARES Act waived the penalty for early withdrawals made during 2020, up to $100,000, if you were impacted by coronavirus. What’s more, you are allowed to spread out any taxable income related to such distributions over a three-year period rather than reporting it all in your 2020 taxes.
There are a number of other tax provisions contained in the different relief packages that could also potentially reduce your tax bite for the 2020 tax year. If you are not already working with a tax professional, now may be the year to do so, as a professional may be able to identify other one-time opportunities to lower your 2020 tax bill.
This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.