All of Your Questions About Filing Taxes During COVID-19, Answered
The COVID-19 pandemic has caused a lot of changes in our daily lives. Many Americans received unemployment during the shutdowns, and other people may had to withdraw from their retirement accounts early in order to make ends meet. It was a confusing time for many people. The good news is that the Internal Revenue Service (IRS) has made accommodations for these unique and unexpected financial situations for the 2020 tax filing season. Here, we spoke with Jill Gonzalez, an analyst at WalletHub, to get the details.
Will unemployment be subject to income tax?
Unemployment is usually considered taxable income. "However, the American Rescue Plan includes a provision to waive income taxes on the first $10,200 in unemployment benefits for those who made less than $150,000 in adjusted gross income in 2020," says Gonzalez. "This partial tax forgiveness is aimed at ensuring families will be able to pay the bills and put food on the table." So, if you have already filed your taxes and need to do an amended return, it is important to contact a tax professional to see how you can get your tax return corrected.
When are federal taxes due and what does the extension mean?
The U.S. Treasury Department and the IRS announced that the federal income tax filing due date for individuals for the 2020 tax year will be extended. "The 2021 tax deadline has been extended from April 15 to May 17, due to the pandemic," says Gonzalez. "This extension applies to both filing and payments, and it means that if you have taxes to pay for 2020, you have until May 17 to do that without incurring penalties or interest. The extension is automatic, meaning that taxpayers don't need to file any additional forms to benefit from it." Of course, if you owe more than expected and can't pay your balance before May 17, you may need to look into payment options with the IRS—just don't ignore outstanding debts if you have them.
What are the tax obligations for early withdrawal from retirement accounts if used for COVID-related financial reasons?
Early withdrawal from retirement accounts usually come with penalties. "Those who were affected by the pandemic and have retirement accounts could withdraw up to $100,000 of their savings without early withdrawal penalties all throughout 2020," explains Gonzalez. "This income is still taxable, but contributors have the option to spread those taxes over three years. Alternatively, people can choose to pay back the funds withdrawn over a three-year period, without having the amount recognized as income for tax purposes."
What about stimulus payments? How do they affect taxes?
If you received a stimulus payment, you will not owe any taxes on it or have to pay it back. "Stimulus payments are not considered taxable income, and thus don't really affect taxes. Some people, however, may qualify for a recovery rebate credit," says Gonzalez. "This tax credit is meant for those who haven't received a stimulus payment last year, or who had a change in their situation, such as a new child."
Is working from home (for W2 workers) tax deductible?
If you worked remotely and thought you'd be eligible for certain deductions, it's not that simple: "Unfortunately, full time W-2 employees who are working from home are not eligible for the home office deduction," says Gonzalez. "That's because these tax write-offs were suspended in 2017 through 2025. The only ones who can benefit from this deduction are self-employed taxpayers and independent contractors." So, you will not be able to claim the home office deduction but W-2 employees may have other deductions they can take or credits that they qualify for. Your tax professional can help you to know what is and is not allowable.