This year, starting on February 12th, the federal government began accepting tax returns for the 2020 year and let’s just say that if threw a lot of our financial situations for a spin. Whether you lost your job and lived on unemployment for a period of time or received stimulus checks, it’s crucial to understand how COVID-19 will affect your taxes. Here are 3 things to consider:
1. Will your stimulus checks be taxed?
Absolutely not. The stimulus money that you received from the federal government will NOT count as taxable income to report on your taxes. The reason that this is the case is because it’s being treated like a refundable tax credit for 2020 which in plain terms basically means that it acts sort of like an advance on money you would have received anyway as part of your refund in 2021.
Something to keep an eye out for is that if you did receive a stimulus payment (or an Economic Impact Payment), your tax preparer may request a 1444 or a 1444-B document from you. However, don’t be alarmed if you haven’t heard of this until now. This doesn’t mean it’s taxable as the government is simply looking to reconcile who has received checks and who hasn’t during this time. The IRS has mailed these forms out so if you didn’t receive yours, you should still enter the amount you received in advance payments to accurately calculate your recovery rebate credit.
Make sure you talk to a tax expert to see what all is needed from you on your end during this time. A lot of tax preparers will even take a simple bank statement of the deposit as a replacement if you don’t end up receiving one in the mail.
2. I lost my job during the pandemic and took unemployment benefits. Will that be taxed?
Yes, if you received unemployment benefits in the year 2020, that income is taxable. Many were given the option to withhold 10% (you weren’t able to choose a lesser or greater amount) as a safeguard to make sure they withheld some money for taxes.
If you didn’t withhold money, make sure you discuss with your tax expert what your expected tax liability will be this year to ensure that you aren’t footed with a massive bill from the federal government during this time of great financial insecurity.
3. If your income was less in 2020 than in 2019, make sure you file your taxes as soon as possible.
My friend, Art Rainer, shared this tip a week ago and it has proven to be a very valuable thing to consider as we wonder if the federal government will move forward with another stimulus bill. If your income was less in 2020 than it was in 2019, file your 2020 taxes as soon as you can.
If/when the government goes forward with a stimulus package, what you receive will be based on your most recently filed taxes. And in this situation, a lower income is better.