Five things to know about the coronavirus relief laws ahead of Tax Day
The multiple coronavirus relief packages signed into law include a number of provisions related to taxes, including several that households should be aware of as they file their 2020 returns.
“There were three giant tax bills passed in 2020 and after 2020 that impacted all taxpayers,” said Mark Steber, chief tax information officer for the tax-preparation company Jackson Hewitt.
Tax Day is later than usual this year, with the IRS extending filing and payment deadlines from April 15 to May 17 as a result of the pandemic. People in Texas, Louisiana and Oklahoma have a deadline of June 15 because of winter storms.
Stimulus and aid legislation enacted last year by former President Trump and this year by President Biden included provisions that provide tax relief for 2020 in areas including stimulus payments, unemployment benefits and charitable contributions.
“It’s important for taxpayers to be educated on all these various tax-code changes,” said Adam Markowitz, an enrolled agent based in Florida who prepares individual and business tax returns. He recommended that people who are unfamiliar with the changes and uncomfortable preparing their own taxes seek out a professional.
Here’s what you need to know about COVID-19 relief laws and your taxes as the May 17 deadline approaches:
People can use their 2020 tax returns to claim stimulus payment money that they are entitled to but have yet to receive.
Coronavirus relief laws have provided for three rounds of direct payments. In each case, individuals with income of up to $75,000 and married couples with income of up to $150,000 are eligible for full payment amounts, and the amounts are reduced above those thresholds.
The IRS issued the first two rounds of payments last year and early this year. These advance payments were based on people’s 2018 or 2019 tax returns, but the ultimate payment amount is based on people’s 2020 returns. As a result, people who saw their income decline or welcomed a new child in 2020 may be entitled to more money when they file their tax returns this year.
If people have not already received the full amounts of their first- and second-round payments to which they are entitled, they can claim the “recovery rebate credit” for the amounts they haven’t received on their 2020 tax returns.
First-round payments are for up to $1,200 per adult and $500 per child, while payments in the second round are for up to $600 per adult and per child.
The third round of payments, authorized by legislation enacted in March, provides for payments of $1,400 per person. The IRS has started issuing these payments based on people’s 2019 or 2020 returns.
Some people are eligible for bigger third-round payments based on their 2020 income than they were based on their 2019 income. In these cases, the IRS is issuing additional stimulus payments to people after they file their 2020 tax returns.
The stimulus checks are not taxable income, so people don’t have to pay taxes on funds that they have already received.
The coronavirus relief law enacted in March exempts the first $10,200 individuals received in unemployment compensation in 2020 from federal income taxes. This change, which applies for households with income of under $150,000, is designed to help the millions of Americans who lost their jobs during the pandemic.
Married couples filing jointly can exempt up to $10,200 in unemployment compensation for each spouse, meaning that couples can exempt up to $20,400.
People who have not yet filed their 2020 tax returns can take advantage of this tax exemption when they do.
Recipients of unemployment benefits who filed their tax returns prior to the enactment of the March relief law do not have to file amended returns in order to take advantage of the exemption. The IRS said it will issue refunds to taxpayers in this category automatically, and it expects to start issuing those refunds this month.
Under COVID-19 relief legislation enacted last year, people who take the standard deduction can also deduct up to $300 in charitable contributions on their 2020 tax returns.
That’s a change from most years, when people can only deduct charitable contributions if they itemize their deductions rather than taking the standard deduction. About 87 percent of taxpayers took the standard deduction on their 2018 returns, according to the IRS.
The $300 limit for the deduction applies to both single filers and married couples for 2020 tax returns. However, for the 2021 tax returns people will file next year, the limit is increased to $600 for married couples.
Charitable contributions aren’t the only area where coronavirus relief legislation has impacted tax deductions. Legislation also directed the IRS to issue regulations that clarifies that educators can use an existing deduction for out-of-pocket expenses to deduct the costs of personal protective equipment and cleaning supplies. The IRS issued that guidance in February.
Earned income tax credit and child tax credit
The COVID-19 package that Trump signed in late December includes a provision that allows taxpayers to use their 2019 income instead of their 2020 income when determining their amounts for the earned income tax credit and the child tax credit — two credits that are very important to low- and middle-income families.
This provision is aimed at helping to ensure that people don’t receive smaller credit amounts on their 2020 tax returns because their income fell as a result of the pandemic.
The relief package Biden enacted this year includes expansions of the earned income tax credit and child tax credit that apply for the 2021 tax year.
Distributions from retirement accounts
Coronavirus relief legislation enacted last year provides tax relief for people who took withdrawals from certain retirement accounts in 2020, such as traditional Individual Retirement Accounts and 401(k) accounts, as a result of coronavirus-related hardships.
People under age 59 1/2 are typically required to pay penalties if they make withdrawals, but those penalties are waived for pandemic-related distributions made in 2020.
Additionally, people can pay taxes on their 2020 distribution amount over the course of three years, rather than needing to pay taxes on the full amount on their 2020 returns. If people pay the distribution amount back to their retirement accounts within three years of withdrawal, they will ultimately not owe taxes on the distribution money.
The retirement-related tax relief applies for coronavirus-related distributions of up to $100,000.