Because of COVID-19, small business owners and employed Americans have endured several changes that could impact their 2020 taxes.
A record number of people, including those who are self-employed, filed for federal unemployment benefits in 2020. Many reduced their work hours to provide medical care or childcare, dipped into retirement accounts early to cover expenses, or began working remotely for the first time.
Here's what tax professionals are telling their clients about tax season 2020.
Your Federal Unemployment Income Is Taxable
You have to pay taxes on unemployment income. Even though it's classified as unearned income, it's taxed at the same rate as earned income.
The biggest shock will come to those in low-income families that typically qualify for the earned income credit, says Timalyn Bowens, owner of Bowens Tax & Bookkeeping Solutions.
"The credit was designed to give low-income earners, especially those with children, a bit of tax relief with a refundable tax credit if their income was below a certain threshold," she says. "This year, those families likely brought in more income due to unemployment benefits, which could make them ineligible for the earned income credit and create a tax obligation they don't usually have."
Stimulus Checks Are Not Considered Income
Instead, the federal government considers the money you might have received as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act a refundable tax credit.
According to the IRS, "It will not reduce your refund or increase the amount you owe when you file your 2020 federal income tax return."
Early Retirement Plan Withdrawals Get Special Treatment
Did you have to withdraw from your retirement plan early for essential expenses? If it's considered a coronavirus-related distribution and doesn't exceed $100,000, the federal government will waive the 10% early-withdrawal penalty.
Lynn Mucenski-Keck, partner at CPA firm The Bonadio Group, says this applies to distributions made in 2020 to someone diagnosed with COVID-19 or whose spouse or dependent had the disease. It also applies to layoffs, reduced hours, or a lack of childcare because of virus-related issues.
"Not only is the 10% penalty waived, but all of the distribution does not have to be included in the 2020 tax year for federal income tax purposes, but can be included ratably over three years," Mucenski-Keck says.
No Home Office Deduction for Remote Workers
Employees who shifted to working from home won't receive any tax benefits for home office equipment or furniture.
"If the employer didn't reimburse them for those expenses, they're coming straight out of pocket," Bowens says.
Self-Employed Get Tax Credit for COVID-19 Sick Leave
"If self-employed individuals had to miss work due to illness or the need to take care of their children, they most likely will receive a tax credit," says Mucenski-Keck. Self-employed people may also qualify for a COVID-19-related, 10-week medical leave credit.
During 2020, all employed individuals—not just self-employed individuals—who quarantined because of COVID-19, experienced symptoms or cared for individuals experiencing symptoms or who had to quarantine qualify for sick leave. This benefit also applies to people caring for a child if their school or childcare provider was unavailable due to COVID-19 precautions.
Where You Work Could Impact Taxation
Relocating temporarily to work remotely while waiting for your workplace to reopen could impact how the government taxes your income. It's possible that your temporary location will want to collect taxes on the income you earn while working there.
"This is a super-hot topic," says Paul Miller, managing partner at Miller & Company LLP. "A lot of states have huge deficits and will dig in to say you worked in that city or state."
Preparing for April 15, 2021
Experts advise getting organized now so you can plan for any changes, particularly if you didn't have income tax withheld from unemployment benefits. It will come due April 15.
"Do a projection now," Miller says. "I am getting clients to send in their year-to-date pay stubs and running the numbers."
It's not business as usual this year, so if the coronavirus had an impact on your income, employment, or small business, consider consulting a tax professional. It could help you avoid mistakes and surprises.