Following such an unprecedented year, the Internal Revenue Service recently shared important reminders for taxpayers, many of which may be relevant to larger numbers of taxpayers than in previous years. Keep the following in mind as you gather documents for the filing of your 2020 tax return.
Choose direct deposit
As many discovered with the first stimulus check, the safest, most accurate, and fastest way to get a refund is to electronically file and choose direct deposit. Direct deposit means any tax refund is electronically deposited for free into a taxpayer’s financial account.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) can give qualifying workers with low-to-moderate income a substantial financial boost. EITC not only reduces the amount of tax someone owes but may give them a refund even if they don't owe any taxes or aren’t required to file a return. People must meet certain requirements and file a federal tax return in order to receive this credit. The EITC assistant on IRS.gov can help people determine if they qualify.
Taxpayers may elect to use their 2019 earned income to figure the EITC if their 2019 earned income is more than their 2020 earned income. Taxpayers also have the option of using their 2019 income to figure the Additional Child Tax Credit for 2020.
Taxable unemployment compensation
Millions of Americans received unemployment compensation for the first time last year. As a reminder, this compensation is taxable and must be included as gross income on your tax return. Taxpayers can elect to have federal taxes withheld from their unemployment benefits or make estimated tax payments, but if you did not, taxes on those benefits must be paid when the 2020 tax return is filed.
Interest is taxable income
Many individual taxpayers who received a refund on their 2019 tax returns also received interest from the IRS. The interest payments were largely the result of the postponed filing deadline of July 15. The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return.
The IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10. The average refund interest amount is $18, but the amount for each taxpayer varies based on the tax refund that the taxpayer received.
Home office deduction
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.
Workers moving into the gig economy
Many people found different employment in 2020, including jobs in the gig economy. Gig-economy workers generally do not have taxes withheld from their pay as salaried workers normally do, which is why the IRS encourages people earning income in the gig economy to consider making quarterly estimated tax payments to stay current with their federal tax obligations.
Charitable donation deduction for people who don’t itemize
Individuals who take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. You can check the special Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.
Under this change, individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2020. This deduction does not apply to donated property. The maximum deduction is $150 for married individuals filing separate returns.
Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Some 2020 tax deadlines in certain counties have been extended into 2021 due to recent wildfires, hurricanes or flooding.