Tax Day is Thursday, April 15, 2021
Even though the 2020 tax-filing deadline has shifted due to COVID-19, the deadline for filing your 2020 taxes is Thursday, April 15, 2021.
Standard Deduction Increases
Standard deductions generally rise each year on account of adjustments for inflation. The IRS reports that for 2020, the standard deduction amounts for the following tax-filing statuses are:
Married filing jointly: $24,800 — up $400 from 2019
Married individuals filing separately: $12,400 — up $200
Head of household: $18,650 — up $300
Single: $12,400 — up $200
The standard deduction reduces the amount of your income that’s subject to federal taxes. So, if a single person is eligible for and chooses to take the standard deduction (as opposed to itemizing deductions) on their 2020 tax return, they would not be taxed on the first $12,400 of their income from 2020[1].
Retirement Plans: 401ks, IRAs and More
The Coronavirus Aid, Relief, and Economic Security Act of 2020, better known as the CARES Act, waived required minimum distributions (RMDs) from retirement accounts for 2020.RMDs generally count as taxable income. So, this one-time reprieve means that some retirees will have lower taxable incomes in 2020 and thus possibly owe less in federal income taxes in 2021[2].
Coronavirus Stimulus Check Taxability
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s $2 trillion relief package, the government sent up to $1,200 in the form of a stimulus check to millions of Americans shortly after the pandemic shut most of the country down. The good news is your stimulus check will not count as taxable income. Instead, it’s being
treated like a refundable tax credit for 2020. Translation: Your stimulus check is sort of like an advance on money you would have received anyway as part of your tax refund in 2021[3].
Unemployment Benefits
Many Americans found themselves out of work (at least temporarily) after the pandemic shut down a large part of the economy and turned to unemployment insurance for help. Those who received unemployment benefits will need to pay income taxes on that money.
If you chose not to have taxes withheld from your benefits when you signed up, then you’ll
either have to pay quarterly estimated taxes or set aside enough money from your
unemployment benefits to pay your taxes come Tax Day[4].
Charitable Contribution Deductions
If you like to give like no one else, we have some great news! In an effort to encourage more charitable giving, 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, in qualified charitable donations if you plan to itemize their deductions.
What if you’re taking the standard deduction? Well, the CARES Act added a new “above-the line” deduction that will help you write off up to $300 of charitable contributions you made in cash[5].
Home Office Deductions
If you’re self-employed, there are a bunch of deductions you can claim on your tax return— including travel expenses and the home office deduction if you use a part of your home to conduct business. But if you’re one of the millions of workers who were sent home to work remotely, you won’t be able to claim the home office deduction since it’s reserved for self-employed individuals only. Sorry![6]
Education Expenses: 529 Plans and ESAs
Any money you take out of a 529 plan or Educational Savings Account (ESA) must be used for qualified educational expenses in order to be tax-free. Makes sense. But a lot of schools went remote or cancelled classes this year—which means your college might have refunded some or all of your 529 or ESA money. If that’s the case, you have 60 days to put the money back in the account or use it to cover other educational expenses. If you didn’t, you might have to pay income taxes and a withdrawal penalty.
There are also a couple of new ways you can use 529 plans in 2020 without having to pay any taxes. First, you can now use 529 plans to pay for the costs of certain apprenticeship programs—including fees, books and supplies. And second, you can also use money from a 529 plan to pay ox up to $10,000 in student loan debt (that’s $10,000 total—not annually) without having to pay any penalties or taxes[7].
[1] Bowsher, Karla. “10 Ways Your Taxes Will Change in 2021.” Money Talks News, 29 July 2020, www.moneytalksnews.com/how-your-taxes-will-change-in-2021/.
[2] Ibid.,2
[3] Ramsey Solutions. “Tax Season 2021: What You Need to Know.” Daveramsey.com, Ramsey Solutions, 8 Dec. 2020, www.daveramsey.com/blog/tax-season-what-you-need-to-know.
[4] Ibid.,6
[5] Ibid.,4
[6] Ibid.,5
[7] Ibid.,6