Coronavirus Tax Breaks
By: Amanda Garland
Tags: Money, Taxes, Finance, Pandemic, Coronavirus

Coronavirus Tax Breaks

How the pandemic could save you money on your 2020 taxes

Photo by Markus Winkler on Unsplash

The word ‘Coronavirus’ does not inspire warm fuzzy feelings, especially when it comes to finances. Between high unemployment rates, a big dip to the stock market, and increased medical bills, Covid-19 is costing us money, not providing it. But there may be light at the end of the 2020 rainbow in the form of Coronavirus related tax breaks. A handful of recent tax laws passed could dramatically reduce your tax-time bill or increase your tax refund. Here are 4 ways pandemic related tax law changes could actually save you money.

Stimulus Tax Credit

The stimulus checks that were sent out to (nearly) every American earlier this year were actually an advance payment on a credit for the 2020 tax year. The $1200 per adult and $500 per child will be a credit that is shown on this year’s tax preparations. While most of us have already received our stimulus money, if you somehow missed out on claiming your money, you’ll have a second chance come tax time.

Did you have a baby in 2020? Well, then guess what, you’ll be eligible for that $500 child credit come tax-filing time.

Did your income decrease this year? If the stimulus check you received was less than the full $1200 per person value thanks to last year’s tax return, when you file your taxes this year, you’d be eligible to receive additional stimulus funds.

Worried that your income increased this year and made you no longer eligible for the full stimulus amount? Don’t worry about needing to pay anything back. The IRS will not be asking for any money back, nor will they decrease your potential refund.

Charitable Contributions

With unemployment on the rise and social distancing in place, many charitable organizations have been suffering. Local churches, food banks, and other organizations that don’t receive funding on the national level have seen a significant decrease in donations as well as an increase in disbursement needs. To combat this problem, a feature of the CARES act was introduced to provide a tax incentive for charitable contributions.

Prior to this year, you could only claim charitable contributions on your taxes if you were itemizing your deductions. With a standard deduction amount of $12,400 per person, or $24,800 per married couple, itemizing is not beneficial for most Americans.

The CARES act introduced a $300 charitable tax deduction that anyone can take, whether you itemize your taxes or not. If you’ve already donated $300 or more to a charitable organization, or plan to before the tax year is up, then this deduction will reduce your taxable income by $300. If you take the standard deduction, that will be an increase to $12,700 for single filers and $25,400 for married filers.

Photo by Kat Yukawa on Unsplash

There are one or two caveats on using this new deduction. In order to take the credit and not itemize your deductions, the charitable contribution will need to be in the form of cash (or check, money order, etc.). Contributions in the form of property, goods, or services rendered will not qualify for this deduction. If your donations were in the form of property, goods, or services, then you can still file these as charitable contributions if you itemize your deductions.

You are also limited in who you can donate money to. No, you can’t just give your Uncle Edgar $300 to pay his electric bill and file that as a charitable contribution deduction. The IRS is pretty strict on defining charity. Only organizations such as “those that are religious, charitable, educational, scientific or literary in purpose” will qualify. The IRS provides a tool to help you define and search for a tax-exempt charitable organization.

401k Waivers

Many Americans found themselves in a cash crunch at some point this year and looked towards retirement savings to help pay the bills. Disbursements are not only taxable income. They also come with a hefty 10% early withdrawal penalty if taken before the age of 59 ½.

Since many people had to resort to using these funds due to financial hardship, the government has waived the 10% tax penalty for the 2020 tax filing year. Depending on how much you pulled from retirement savings, this waiver could save you a huge chunk come tax-filing time.

401k hardship disbursements are still taxable income, but you have the option of deferring the tax bill over the course of several years. If you took out $15,000, you could claim $5,000 in income this year, $5,000 next year, and $5,000 the year after that. And if you can pay back the funds to your 401k later, you can file an amended return to receive a refund on the taxes you paid on the disbursement.

Decreasing Income

Having a decrease in income is usually not something to celebrate, but there are a few ways you can benefit from the situation come tax time this year.

Retirement funds took a big hit early this year when the stock market tanked. While the market has seen some gains since then, many retirement accounts have not yet recouped their losses. For those already at retirement age, this meant taking the Required Minimum Disbursement from an account that was potentially suffering heavy losses thanks to the pandemic. For the 2020 tax filing year, the government has chosen to waive this Required Minimum Disbursement (RMD).

If you did not hit the RMD value this year, no worries, there won’t be a penalty for it this year. If you already took the RMD, you had the option of getting with your financial/fund advisor to put the money back if you chose to. The waiving of RMD is a step towards keeping your retirement savings stable during a year that has been anything but.

Photo by Matthew Lancaster on Unsplash

A reduction in income also comes with a decrease in tax dollars owed. Here are some other potential benefits you could see come tax time:

A lower tax bracket equals a lower marginal tax rate.

Additional stimulus funds if you only received partial (or zero) payment earlier this year.

Quarterly estimated taxes could have caused an overpayment, which will result in a refund.

Eligibility for income controlled tax credits like the saver's credit, earned income credit, child tax credit, and more.

There is no doubt that the Coronavirus pandemic has caused financial hardship for many in this county this year. Recent reforms to tax law won’t magically erase this hardship, but a lower tax bill will help relieve some of the stress experienced during the upcoming tax season.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.