Your 2020 tax return might not be as unusual as the year itself, but there’s a good chance that you’ll face a few unusual quirks and questions as you prepare to file. How do economic stimulus payments affect income taxes? Which state do I pay taxes to if stay-at-home orders canceled my commute across state lines? Here’s what you need to know as you prepare your 2020 taxes…
Expect extended delays if you file through the mail. Processing times could stretch to several months as the IRS copes with massive pandemic backlogs caused by reduced in-office staff.
If you’re owed a refund, file online and/or as soon as possible to minimize how long it takes to receive your money.
But if you owe money and want to push back your payment date, consider filing through the mail on or shortly before April 15. As long as your payment is postmarked by April 15, you won’t face late-payment penalties or more interest, even if your payment isn’t processed for months. Send your payment via certified mail so that you can prove you didn’t miss the deadline.
You might be able to file for economic stimulus payments on your tax return. Did you miss out on the much publicized stimulus payments distributed in 2020 and early 2021? If your adjusted gross income (AGI) was above $75,000—above $150,000 if married filing jointly—on your 2018 or 2019 tax return, you might have received reduced payments or no payments at all. But your 2018 and 2019 AGIs were just an estimate of your eligibility. What actually matters is the AGI on your 2020 return. If you received less than the full payments—that’s $1,200 per adult plus $500 per qualifying child during the first round…and an additional $600 per adult and qualifying child in the second round—and you meet the income requirements, complete the Recovery Rebate Credit Worksheet in the Instructions for Form 1040 or Form 1040-SR and follow the instructions to claim a “recovery rebate credit.”
On the other hand, what if your AGI increased in 2020 and you are ineligible for stimulus payments that you already received? Surprisingly, you can keep the money.
Helpful: You do not have to report stimulus payments as taxable income on your return—they’re considered tax credits, not income.
If you lost your job, you might face another financial hit when you pay your taxes. Unemployment benefits are taxable income, something that will surprise some of the millions of Americans who lost their jobs in 2020. The resulting tax bills could be especially substantial this year, as supplemental benefits of as much as $600 per week inflated total unemployment benefits to more than $1,000 a week for some people. If you received $1,000 in benefits per week for 26 weeks, those benefits could trigger a tax bill of $3,120 if you’re in the relatively low 12% tax bracket (income up to $40,125 for single individuals or $80,250 if married and filing jointly). That’s a significant tax bill for someone already struggling with the loss of a job. To avoid this problem in future years, file Form W-4V, Voluntary Withholding Request, with the unemployment office to have taxes withheld or make quarterly estimated tax payments.
State exceptions: Six states have state income taxes but do not consider unemployment benefits taxable income on state returns—Alabama, California, Montana, New Jersey, Pennsylvania and Virginia.
Remote college classes could trigger tax penalties. Many parents of college-age students received refunds from schools in 2020 as the pandemic caused classes to be canceled and dorms to be shut down. That could have unexpected tax consequences if these education-related costs were originally paid using money from a tax-advantaged college savings account such as a 529 plan. If the refunds were not recontributed to the beneficiary’s 529 plan within 60 days of the refund date—or spent on other qualified expenses, such as computer equipment to help the student take classes remotely—they count as nonqualified withdrawals, triggering income taxes plus a 10% penalty.
Some good news: These taxes and penalties apply only to the portion of the refund attributable to the 529 plan’s investment earnings, not to the principal. State tax penalties might apply as well. Exception: If the college issued the refund in the form of a coupon or credit that can be applied to future college expenses, not as cash or a check, that refund will not trigger these consequences, because there was no way to redeposit the credit in a 529 plan.
You can’t deduct home-office expenses as an employee—even if you worked from home during the pandemic. Millions of Americans worked from home offices in 2020, yet most of them cannot claim a home-office tax deduction. Self-employed people and small-business owners often can deduct home-office costs, potentially including a portion of their mortgage or rent…but due to a tax law that took effect in 2018, employees generally are not eligible to do so—even if they use part of the home exclusively for business.
Your 2020 charitable donation might be deductible—even if you take the standard deduction. A special rule enacted for 2020 and extended to 2021 provides a limited exception—up to an additional $300 can be deducted even if you take the standard deduction. There are a few details that are worth noting, however—the donation must have been made during 2020 to be deducted from your 2020 taxes…it must have been made to a 501(c)(3) public charity…and it must have been a cash donation, which includes donations made by check, credit card or debit card, but excludes claiming the cash value of donated financial securities or other possessions, such as used clothing given to Goodwill. Also, that $300 limit applies whether you’re a single filer or a joint filer—married couples filing together cannot deduct $300 apiece in 2020. They will be allowed to deduct up to $300 apiece in 2021, however.
There are special charitable donation rules for taxpayers who itemize, too—in 2020, these taxpayers can deduct charitable contributions up to 100% of their AGI, rather than the usual 60%.
Helpful: The IRS’s Tax-Exempt Organization Search tool at IRS.gov/charities-and-nonprofits can help you confirm that an organization qualifies as a public charity.
If you are a commuter, you probably owe income taxes to your employer’s state—even if you’ve been working from your home in a different state. In normal years, commuters generally are required to pay taxes on income they earn from their employer in the state where their workplace is located. For much of 2020, many commuters instead worked from home—but counterintuitively, they probably still must pay income taxes to the state where their employer’s workplace is located, so talk to a tax professional.