- Every year, new laws and adjustments for inflation can alter your tax liability.
- COVID-19 relief packages passed by Congress created temporary changes to the tax code.
Filing taxes is a multifaceted event filled with complex regulations and rules passed by Congress and managed by the IRS. The pandemic of 2020 created an unprecedented time of statewide lockdowns that negatively affected the economy. Addressing these compulsory closures, Congress sought to help consumers by implementing a host of changes to the tax code, which only apply to this year’s tax filing.
In most years, the IRS begins accepting tax filings between January 15 and February 1. Before you file, review the tax code’s recent changes to maximize your tax refund or minimize the amount you owe.
Pandemic Related Changes to Your Taxes in 2021 Thanks to the CARES Act
Taxation of Stimulus Money: The IRS issued stimulus checks to 160 million people, with the second round of smaller checks distributed in the early days of 2021. Technically, stimulus checks are refundable tax credits. You will not owe taxes on the amount received, and the payment will not impact your qualification for other federal or state benefits, including unemployment.
If household income fell during 2020 to a level that would qualify you to receive a stimulus check, you can claim the tax credit when you file in 2021.
The Tax Treatment of Unemployment: The CARES Act paid out federal unemployment in unprecedented numbers and included benefits for workers not typically covered, like the self-employed and contract workers.
The federal government taxes unemployment at the same level you would pay if you earned money. Most states follow the federal guidelines, taxing unemployment benefits at the state level as well.
The unemployment received could push you into a higher tax bracket and leave you owing the IRS if you chose not to take taxes out of your benefits.
Waived Penalties on Retirement Account Withdrawals: The IRS imposes a penalty on any monies removed from qualified retirement accounts before reaching 59 ½, outside of a limited number of exceptions. Withdrawing from a Traditional IRA or 401K could also put you on the hook for taxes on withdrawals, regardless of age.
The CARES Act authorized penalty-free withdrawals from qualified accounts up to $100,000 or 100% of the vested balance, waiving the early withdrawal penalty. The taxation on withdrawals remains the same.
Waived Required Minimum Distributions (RMDs): In addition to waiving the penalty on withdrawals, the CARES Act also waived RMDs on retirement accounts. In most cases, you must take distributions from Traditional IRA and 401k accounts after reaching 70 ½. The IRS taxes these withdrawals as ordinary income because the contributions were tax-deferred.
Waiving mandatory withdrawals could lower taxable income for retired families if you chose not to take any withdrawals from retirement accounts.
Deduction for Non-Itemized Charitable Contributions. The higher standard deduction eliminated the need for many households to itemize, eliminating charitable deductions for millions of families. However, in 2021, you can deduct 100% of charitable donations made to a qualified charity or non-profit, up to $300, even if you do not itemize. To qualify, you must donate on or before December 31, 2020.
Inflation Adjustments Changes to 2020 Income
Higher HSA Limits: Individuals may contribute up to $3,550 to a health care savings account or HSA, a $50 increase. Families received an increase of $100 and can contribute up to $7,100.
Inflation-Adjusted Income Tax Brackets and Standard Deduction:
The standard deduction for married couples filing a joint return increased $400 to $24,800, head of household increased by $300 to $18,650, and single filers for $12,400, a $200 increase over 2019. The Tax Foundation has a complete graph of the 2020 tax brackets here.
Will I owe taxes on my stimulus check?
The economic stimulus payment issued due to the CARES Act is not taxable and, therefore, will not impact your refund. If you have not received the stimulus, but qualify, you can claim the payment through your tax return.
Will I owe More Taxes in 2021?
Congress did not pass any meaningful tax legislation in 2020. There were adjustments for inflation to both tax brackets and the standard deduction. However, events like receiving unemployment or making a withdrawal from your retirement account could result in a higher tax bill.
When is the first day I can file taxes in 2021?
The tax filing deadline is April 15, 2021. The IRS typically begins accepting electronically filed tax returns as early as January 15, 2021.