The 2019 tax filing deadline’s move from April 15th to July 15th may not have be the last time COVID-19 affects your taxes. There are several aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that could affect your 2020 tax return when you file next year.
- Stimulus Payments: The economic impact payments taxpayers received were based on 2019 income but are actually an advance on a 2020 tax credit. If your 2019 income was too high to receive a payment (or you only received a partial payment) and your 2020 income is lower, you may receive that tax credit when you file your 2020 return. However, if you did receive a payment and your income is higher in 2020, you will not have to pay it back.
- Unemployment Benefits: Perhaps one of the most widely known benefits of the CARES Act was the $600-per-week federal boost to state unemployment benefits, but many taxpayers do not remember that unemployment benefits are subject to federal income tax. The additional $600 per week are no exception. Opting into having taxes withheld or putting aside some of the money you receive can make you more prepared for your 2020 tax return.
- Early Distribution Penalty Waiver: Generally, if you withdraw money from your retirement plan before age 59½, there is a 10% tax penalty. However, the CARES Act waived the penalty for this year for those affected by COVID-19 for up to $100,000 in distributions. However, regular income tax would still be assessed on the distribution, though the CARES Act allows you to spread those payments over three years. Those wanting to recontribute the early distribution also have three years in which to do so, and recontributed funds do not count toward annual contribution limits.
- Required Minimum Distributions: The CARES Act also waived the requirement for required minimum distributions (RMDs) for those 72 and older, which are generally taxable. For those who can afford to, skipping an RMD can can positively impact your taxes in three ways. You avoid paying taxes on the RMD, reduce your risk of the RMD pushing you into a higher tax bracket, and you can ride out the market volatility that may have affected the size of your retirement account rather than withdrawing funds while your assets underperform. If you already took an RMD in 2020 but have changed your mind, you can repay the distribution until August 31st.