With people getting ready to file their 2020 taxes, here are some changes to taxes this year based on the Covid Relief bill. In addition, see how the most common government Covid-Relief programs for individuals are taxed.
For 2021 taxes: 2021 Tax Return and Covid Relief
Filing Extension
The deadline to file 2020 federal taxes has been extended to 05/17/2021. The IRS announced that the deadline to contribute to IRAs and health savings accounts has also been extended to May 17.
Check if your state also extended the deadline. NY and NJ extended their deadline to 05/17/2021.
Unemployment
Unemployment offers weekly payments for people who are eligible.
Federal taxes apply to all unemployment payments (standard and bonuses). State taxes depend on the state (NY and NJ both have state taxes on Unemployment).
- Standard payments
- Weekly payments, either regular Unemployment (UI) or Pandemic Unemployment Assistance.
- Bonuses
Withholding Taxes
When you apply for Unemployment, you choose whether to have taxes withheld. You generally have the option to have 10% withheld for federal taxes and an additional amount for state taxes (if your state has taxes on Unemployment payments).
The exact amount you will owe depends on many individual-specific circumstances during the entire year (how much you earned besides Unemployment, how many dependents you have, and other variables). Depending on circumstances, many people will actually owe less than 10% in federal taxes for Unemployment payments, or in fact nothing at all, while others may owe more than 10%. If you have the 10% federal taxes deducted and you owe less than that, you will get the difference as a refund. If you owe more, then you will need to pay more.
Filing Taxes – 1099-G Form
Every January, each state’s Unemployment department should prepare a form 1099-G, which includes the total of all your Unemployment payments from the previous year. Whether or not you chose to withhold taxes, you need to include the 1099-G form in your tax return. Here is how to get the 1099-G form in NY.
Note: Being that Unemployment is considered “unearned income”, minors and dependents who received more than $1,100 in Unemployment need to file their own return.
$10,200 Tax-Free for 2020
Federal Taxes
American Rescue Plan Act (3/11/2021): $10,200 in Unemployment payments from 2020 are tax-free for those with less than $150K income. The requirement to have 2020 income under $150,000 in order to be eligible for $10,200 tax-free, does not include Unemployment payments. So, for example, if your income (not including unemployment) was $140,000, and you received $30,000 in Unemployment payments (totaling $170,000) you would still be eligible for the $10,200 tax-free. If you already filed 2020 taxes before the bill was passed, you do not have to file an amended return. The IRS will adjust your account and send any refund amount directly to you.
State Taxes
Each state decides separately whether they will also allow the $10,200 tax-free or not. So far it looks like NY is charging taxes on the full amount.
PPP
PPP offers self-employed and 1099 workers two grants of 20% of their annual net income (totaling 40%). Businesses with payroll can get two grants of 2.5 months worth of annual salary (totaling 5 months).
There are no federal taxes on PPP (once the loan is forgiven).
Most states, including NY and NJ, are not taxing PPP.
EIDL Grant
EIDL Grant: of up to $10k for small businesses or self-employed/1099 workers.
There are no federal taxes on the EIDL grant.
Most states, including NY and NJ, are not taxing the EIDL grant.
EIDL Loan
EIDL Loan of up to $150k at 3.75% interest (2.75% for non-profits) for small businesses or self-employed/1099 workers.
The EIDL loan needs to be paid back, so that’s definitely not taxable.
Stimulus Payments
Stimulus payments for those who are income-eligible
Round 1: $1,200 per adult and $500 per child
Round 2: $600 per adult and $600 per child
Stimulus checks are not taxable.
If you did not yet get the full amount for either EIP #1 or EIP #2, request the payments as part of your 2020 tax return.
FFCRA is Covid paid-leave of 2 weeks full pay (capped at $511/day) and 10 weeks at 2/3 pay (capped at $200 a day). Employees can get a maximum of $12,000 and Self-employed/1099 workers can get a maximum of $10,000.
- Self-employed people: Get the credit as a refund on your taxes. This is not taxed.
- Employees: You were paid from your employer. It is considered wages and taxed as normal.
- Employers: Receive a refund on the gross wages which were paid to employees. No taxes paid on the refund.
Earned Income (Tax) Credit (EIC)
Earned Income Credit (EIC) is a tax credit/refund of up to $6,660 for people who have earned income up to $56,844. The Earned Income Credit is a percentage of your earned income and depends on your filing status and other details.
Due to Covid, there are special rules when filing 2020 taxes: If your earned income was higher in 2019 than in 2020, you can use your 2019 earned income amount to figure your EIC for 2020. You can check which year’s (2019 or 2020) earned income will get you a bigger credit and use that year’s earned income amount.
Remember, Unemployment is not considered earned income, so you might want to use 2019 even if you had more income in 2020 when including unemployment payments.
Child Tax Credit (CTC)
Child Tax Credit is a $2,000 credit per child for those with a qualifying child under the age of 17 ($1,400 per child (ACTC) is fully refundable even if no taxes are owed).
Due to Covid, there are special rules when filing 2020 taxes: If your earned income was higher in 2019 than in 2020, you can use the 2019 earned income amount to figure your credit for 2020. This may get you a higher credit/refund. Use your 2019 earned income if it helps you qualify for more credit.
Flexible Spending Account (FSA)
A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put pre-tax money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside.
Option to roll over balances from 2020 to 2021 (and balances from 2021 to 2022).
$250 Educator Expense Deduction
If you’re an eligible educator, you can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 for each spouse) for classroom supplies. You don’t have to itemize to take advantage of it and it also reduces your Adjusted Gross Income (AGI).
If you spent the $250 on Covid-related protective gear after March 12, 2020, that also counts towards the $250.
$300 Charitable Donations Deduction
Usually, charitable donation deductions are only helpful for those that itemize their deductions. Most people take the standard deduction and as such cannot deduct their charitable donations.
For 2020, even if you don’t itemize, you can still deduct up to $300 for donations. This also reduces your AGI. It’s $300 per tax return, so even if you file jointly it’s still $300. For 2021 it will be $600 for joint filers.