Updated: Jan 28
Here are some answers to some of the biggest questions about how the coronavirus (and everything that followed because of it) might affect your 2020 tax returns, plus some action steps you can take to prepare yourself and avoid any nasty “Tax Day” surprises.
1. Will the stimulus check money I received be taxed?
Nope, the stimulus money that you received from Uncle Sam will not count as taxable income. So that’s one less thing you have to worry about when Tax Day rolls around!
In March, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in an effort to try and provide help to everyday Americans during the height of the coronavirus pandemic.
Individuals who filed taxes in 2018 or 2019 received $1,200 for each adult and $500 for each child. So a household with two adults and two children, for example, most likely received $3,400 in stimulus money. So, why isn’t that money being counted as taxable income? Because 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.
2. I took money out of my 401(k). What’s going to happen with the money I took out?
Another thing the CARES Act did is allow people to take a type of “hardship withdrawal” of up to $100,000 out of their retirement accounts until the end of 2020 without having to pay the usual 10% early withdrawal penalty.
But even without the early withdrawal penalty, you’ll still have to pay income taxes on any money you take out of your traditional 401(k)s and IRAs. If you’re not careful, you could bump yourself into a higher tax bracket and owe Uncle Sam even more in taxes for this year.
Look, if you’re currently staring at your 401(k) balance with hungry eyes, let us dump a bucket of ice-cold water on that idea:
Don’t do it. We don’t want you to even think about taking money out of your retirement accounts. The only time it ever makes sense to tap into those accounts is to avoid bankruptcy and foreclosure. That’s it.
Even without the early withdrawal penalty, raiding your 401(k)s and IRAs is a bad idea for two reasons. First, you’re sabotaging your money’s ability to grow over the long term and basically stealing money from your future self. Not cool. And second, like we just talked about, you’ll have to pay taxes on the money you take out.
But to the point, what if you already took some money out of your 401(k)s and traditional IRAs? The good news is you can undo that mistake! The CARES Act allows you to return any funds within the next three years and file an amended return. That way, you can get a refund on the taxes you paid on that money and get your retirement savings back on track.
3. I lost my job and received unemployment benefits. Are those benefits taxable?
Yes, any unemployment benefits you received in 2020 will count as taxable income.
Millions of Americans lost their jobs or were furloughed in the midst of the lockdowns and economic shutdowns, leading to record numbers of people signing up for unemployment benefits.4 The CARES Act also allowed the freelancers, independent contractors and the self-employed to file for Pandemic Unemployment Assistance, a program designed to help folks not usually eligible for unemployment benefits.
There are two ways you can pay your taxes on those unemployment benefits, depending on what you chose when you filed. The first is to have 10% of each payment withheld to cover all or some of what you owe in federal income taxes (you can’t withhold more or less from unemployment benefits). That’s probably the easiest option! If you chose not to have taxes withheld from your benefits, then you’ll have to pay quarterly estimated taxes on that money.
Got Questions? Work With a Tax Pro!
Without a doubt, this tax season is going to be a hot mess for millions of Americans who have seen their lives turned upside down by this pandemic. If you’re one of them, it might be a good idea to reach out to a tax preparer for your tax services. RCJ is up-to-date on the latest news and changes for this tax season.
If you want to make sure you get your taxes done right and avoid making huge tax mistakes that could cost you hundreds or thousands of dollars, we are ready to help!