(with apologies to Gabriel Garcia Marquez’s Love in the Time of Cholera)
It’s tax time again and in this extraordinary period, I’m going to concentrate on what’s different and special for this year. This post will include information for the Federal 1040 return. There will be another post on what’s new for the South Carolina returns in a few days.
We’ll start with the fact that the IRS isn’t going to be open for business until February 12, 2021. That means they won’t start processing returns until then. The deadline for filing will remain April 15, 2021, with the usual option to extend until October 15, 2021.
About those Stimulus Checks? They were based on the income you reported for 2019 (or 2018, in some cases) and no, they are not taxable in 2020 or 2021. However, you will have to report the amount you received on your 2020 return, even if you received one or both in 2021. Enter the amount you received in the Recovery Rebate Credit section. Don’t remember how much? You should receive IRS Notices 1444 and 1444-B telling you. Perhaps you didn’t get a check but your 2020 income is lower than 2019? In that case, based on your 2020 income level, you may receive additional credit on your return by completing this section. Got a check when you didn’t expect it? As of now, there is no requirement or provision to return it. The “Where’s My Refund” tool will be updated by February 22 in case you still need to find your rebate.
What about that Social Security Tax that you could defer last year as an employee? The bad news is that as an employee, that will need to be repaid this year. You should expect additional payroll taxes to be withheld from your 2021 paychecks. The rules are different for small business owners, so if you fall into that category you need to consult your tax advisor.
Did you receive Unemployment Compensation in 2020? Hopefully, taxes were withheld from those payments, because unfortunately, it does count as taxable income.
If you were an employer who paid for sick and/or family leave for your employees, there are Sick Leave and Family Leave Credits that you may be entitled to. Be sure to look into them.
Required Minimum Distributions from retirement accounts (RMDs) were suspended for 2020 and there was an option to redeposit any amounts withdrawn before August 31, 2020. If you did this, you’ll need to review the 1099-R you received to confirm that all the transactions are reported correctly. For 2021, unless anything changes, anyone who turned 70½ before January 1, 2020, will have to resume taking distributions. If you turn 70½ after January 1, 2020, you must take your first RMD by April 1 of the calendar year following the year you reach 72.
Are you under 59½ and needed to withdraw Retirement Funds because of the pandemic? This income will always be taxable, but in many cases, the 10% penalty may be waived for 2020. There are also options to spread the income over 3 years, rather than paying all the tax this year or to repay the money and treat the withdrawal as a rollover.
Many people have been disappointed at losing the opportunity to take a deduction for Charitable Contributions since Standard Deductions were raised dramatically a couple of years ago. (This year’s Standard Deduction is $12,400 for a single person and $24,800 for a couple filing jointly with an additional $1,300 per person for people over 65.) However, there are two ways that Charitable Contributions may be deductible. The first is only available to people required to take an RMD. A Qualified Charitable Distribution (QCD) can be made directly to a charity from your IRA and count towards your RMD without being taxable, either to you or to the charity. Be sure to talk to your broker if you didn’t know about this. The second way, while small, is available to everyone. It is a one-time Deduction of up to $300 from your taxable income for Cash, Check, or Credit Card contributions made during 2020. Not a lot, but still worth knowing about.
2020 was a very stressful year for all of us. Here’s hoping some of these ideas help to make your 2020 tax filings in this time of COVID-19 less so!
– Submitted by a Seabrook Island TaxAide Volunteer
(Image credit: clipart-library.com)