It is time to gather all of your important tax documents and information and file your taxes with the Internal Revenue Service (IRS). In addition to gathering your tax details from your employer, your health insurance, etc. you should also consider any tax deductions you may qualify for.
2020 was an unprecedented year for many reasons, so it is important to start thinking about any changes that may have occurred that will affect your taxes. Changes may include a change in employment status, change in housing or childcare, and more.
Here are a few key things to know about the current tax season:
When preparing to file your taxes, you should consider any credits or deductions you might qualify for. Deductions and credits help keep money in your pocket. A few deductions to consider are:
The CARES Act allows you to deduct up to 100% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. The CARES Act also allows a new deduction for people who take the standard deduction that allows you to write off up to $300 of charitable contributions that were made in cash.
If you or someone in your family had any medical issue, or spent time in the hospital this year, you may qualify for a medical deduction. You can deduct medical expenses above 7.5% of your adjusted gross income, which is your total income minus other deductions you may have already taken. In order to receive these deductions, you will have to itemize your deductions.
People who are self-employed can claim several deductions on their tax return including travel expenses, a home office, and more. Unfortunately however, people who have been working remotely for an outside company will not qualify for the home office deduction.
Earned Income Tax Credits
An earned income tax credit helps low- and -middle-income families. You may qualify depending on your income, your filing status and how many children you have.
Child Tax Credit
Families can claim up to $2,000 per qualified child, however there are income limits.
COVID-19 and Taxes
The stimulus checks you received as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act will not count as taxable income.
Paycheck Protection Program (PPP) Loans
Small business owners who received a loan as part of the Paycheck Protection Program (PPP) will be able to deduct eligible expenses paid with the money from the PPP loan. Eligible business expenses include payroll, rent or interest on mortgage payments, utilities and more.
As COVID-19 swept the country, many Americans were left unemployed as many businesses downsized or shut down all together. People who received unemployment benefits will have to pay income taxes on that money.
Educational Expenses: 529 Plans and ESAs
If you received a refund from your financial institution on money from an Educational Savings Account (ESA) because of a change to the academic year (like remote learning) you have 60 days to put the money back in the account or use it to cover other educational expenses. If you don’t, there could be a withdrawal penalty and you may need to pay income taxes on it.
Retirement Plans: 401(k)s, IRAs and More
Retirement plans also experienced some changes due to the CARES Act. For example, it allowed people under the age of 59.5 to take up to $100,000 out of their 401(k)s and IRAs until the end of 2020. If you took money out, it will be taxed as ordinary income.
If you have a traditional IRA, it is required that you take money out of your account once you reach a certain age. The withdrawals are called required minimum distributions (RMDs). The SECURE act pushed back the age for RMDs from traditional IRAs from 70.5 to 72. The CARES Act allows seniors to skip RMDs altogether in 2020 with no penalty.
The SECURE Act also allows people with traditional IRAs to continue contributing money to their accounts beyond the age of 70.5 starting in 2020.
For more information on tax preparation, contact a tax advisor.