En español | Getting ready to tackle your federal income taxes for 2020? Due in large part to the coronavirus pandemic, your return could be different — and perhaps a bit trickier — this year than in years past. Here are 10 things taxpayers should understand before filling out a 1040.
This tax season...
- Deadlines are deadlines
- Penalties are penalties
- There's still a chance to claim missing stimulus checks
- And those stimulus checks aren't taxable
- But your unemployment checks are taxable
- Are you 65 or older? Enjoy a bigger standard deduction
- Taxpayers age 65-plus also enjoy their own tax return
- There's good news about medical expense deductions
- There's also good news about charitable deductions
- Mind your Social Security payroll taxes
Death and taxes may be the two certainties in life, but at least you know when the taxman will come knocking. Federal income tax returns are due May 17 this year, not the traditional April 15 filing deadline. The Internal Revenue Service (IRS) extended the deadline because of the enormous backlog caused by the COVID-19 outbreak and the most recent stimulus bill, whose payments started rolling out shortly after the IRS began processing 2020 tax returns.
The IRS set Feb. 12 as the start date for processing 2020 returns, which is later than normal. It was Jan. 27 last year. The IRS says it needed the extra time to reprogram systems due to the tax law changes on Dec. 27 that authorized a second round of stimulus payments.
Are you a procrastinator? Any taxpayer can get an automatic filing extension to Oct. 15 by submitting Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” However, you still must pay the amount of tax you owe by May 17 or face interest and penalties. Soldiers in combat zones and people living in disaster areas typically get an extension on both filing and paying federal income taxes.
Another certainty: If you're required to file a federal tax return but don't, you'll pay. If you file after May 17 without having asked for an extension, you'll have to pay a late filing fee, which is 5 percent of the taxes you owe for each month, or part of a month, that a tax return is late. That penalty starts accruing the day after the tax filing due date and can build up to a maximum of 25 percent of your unpaid taxes.
The IRS also levies a late payment penalty, which is 0.5 percent of your unpaid taxes each month. (That's 6 percent annually.) If you blow the filing deadline and the payment deadline, however, the maximum monthly penalty is 5 percent of your unpaid taxes. Unlike the late filing penalty, the late payment fee keeps accruing until you pay your taxes.
You can pay your taxes by credit card if you don't have the money you owe on hand. But be warned that you'll be charged a processing fee. You can also ask the IRS for a payment plan via this online tool.
If you didn't get a stimulus check last year — or if you didn't get as much as you were entitled to — you can claim the missing stimulus money on your 2020 tax return in the form of a tax credit called the Recovery Rebate Credit. (The stimulus payments were, technically, an advance on this tax credit.) A tax credit reduces your taxes, dollar for dollar — and in this case, it can not only reduce your taxes to zero but produce a refund.
Here's an example: A family of four who met the eligibility requirements was entitled to a total of $5,800 in the two rounds of stimulus checks. If the family had overpaid their taxes by $200, they normally would have expected a $200 refund. But if the family never received the stimulus payments owed to them, they could recover the money with their 2020 tax return for a $6,000 refund — the $200 in overpaid taxes plus the $5,800 worth of missing stimulus payments.
Use the Recovery Rebate Credit Worksheet that comes with your federal tax return to figure how much of a credit, if any, you're eligible for. The 21-line worksheet looks intimidating, but it's worth the effort if you're missing money. No itemization is required. The amount from the worksheet goes on line 30 of your 1040 form.
According to the IRS, stimulus payments are not considered income and no tax is owed on the money. Stimulus payments are also not considered income for purposes of determining eligibility for federal benefits or assistance programs.
Unemployment benefits were a lifeline for many who lost their jobs last year during the pandemic. Unfortunately, those jobless benefits are taxable — but fortunately, up to $10,200 of 2020 unemployment benefits is exempt from federal income tax for households with an adjusted gross income under $150,000. Married couples who got unemployment payments can each exclude $10,200 of unemployment benefits.
When you signed up for unemployment benefits, you had the option to have taxes withheld. Whether you did or not, you'll receive a Form 1099-G, “Certain Government Payments,” which will show the amount of unemployment benefits you received in 2020 and how much, if anything, was withheld for taxes. Any severance pay you received last year is also taxable.
Depending on your income and the number of dependents you have, you may be eligible for the Earned Income Tax Credit (EITC), which could reduce the taxes you owe, dollar for dollar, by as much as $6,660. Like the Recovery Rebate Credit, the EITC is a refundable credit, which means that you’ll get the full amount of the credit you’re eligible for, even if you had no income and even if it results in a refund.
In order to itemize deductions, you need to have more in deductions than the standard deduction, which everyone gets. For the 2020 tax year, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly, which is up from the $12,200 for individuals and $24,400 for married couples in 2019. It's $18,650 for heads of households, which is up $300 from 2019.
Taking the generous standard deduction isn't the worst thing in the world: If you rented your home or didn't have a pile of other deductions, your standard deduction is probably more than you would get by itemizing. And taking the standard deduction means you don't have to keep a shoebox full of receipts all year.
The standard deduction for 2020 gets even better for age 65-plus taxpayers. Married taxpayers born before Jan. 2, 1956, whether filing jointly or separately, get an extra $1,300 apiece added to their standard deductions. The additional standard deduction is $1,650 for singles and heads of households. You are also eligible for the same additional standard deduction amounts if you are blind and younger than 65. If you are over 65 and blind, the amounts double.
Calculating the bigger standard deduction is made easier with Form 1040-SR, “U.S. Tax Return for Seniors.” The special tax return for those 65 and older includes a simple-to-use standard deduction chart at the bottom of the form that shows the amount of the bigger standard deduction based on your filing status and how many boxes you check for age and blindness. And for those who still use paper forms — electronic filing is highly recommended for speed and security — the 1040-SR form is much easier to read than the standard 1040, thanks to a larger font size for the text.
You need two things to deduct medical expenses. First, all of your itemized deductions, including eligible medical deductions, need to add up to more than the standard deduction. Second, you can deduct only medical expenses that are above a specified threshold of your adjusted gross income (AGI). The temporary current threshold of 7.5 percent, which was scheduled to return to 10 percent in 2021, has now been made permanent, thanks to the pandemic. The permanent 7.5 percent threshold was included in stimulus-related legislation signed into law on Dec. 27.
A remarkably large number of unreimbursed expenses are eligible for the medical deduction in order to help get you above the 7.5 percent threshold — aside from the usual out-of-pocket fees you pay to doctors and dentists. You can deduct the costs of nursing home care, for example, provided that medical services are the main reason for being in the nursing home. You can also deduct acupuncture sessions, smoking cessation programs, false teeth and some insurance premiums.
If you miss taking the deduction for charitable giving because you can't overcome the bigger standard deductions that were implemented in 2018 by tax reform legislation, you're not alone. The charitable deduction was an incentive that helped funnel a great deal of money into charities.
To ease their suffering a bit, Congress allowed anyone who takes the standard deduction to deduct up to $300 in cash donations (which includes currency, checks, credit or debit cards, and electronic fund transfers) made to charities in 2020 directly on their 1040s — no itemizing required. The $300 maximum is per “tax unit,” which means you can only deduct $300, no matter whether you're filing a joint return or a single return. It gets better in the 2021 tax year, when those filing jointly can get a maximum deduction of $600 — $300 per spouse.
The IRS issued guidance last August that gave employers the option to defer collection of employees’ portions of Social Security payroll taxes between Sept. 1 and Dec. 31, 2020. The idea was to give workers a bit more in their paychecks during that four-month stretch in order to help ease the impact of the COVID-19 crisis. Employees originally were required to repay the deferred taxes this year by April 30, either in a lump sum or incrementally through increased paycheck withholdings.
You'll still have to repay any payroll taxes deferred in 2020, but Congress has given you more time to do so. Under stimulus-related legislation signed into law on Dec. 27, you'll now have until the end of 2021 to repay the deferred Social Security payroll taxes before penalties and interest start to accrue.
As a reminder, the Social Security payroll tax is 12.4 percent, with the employee paying 6.2 percent and the employer paying 6.2 percent. Self-employed workers pay the full 12.4 percent themselves. In 2020, you paid Social Security tax on income up to $137,700, an increase from the $132,900 income cap in 2019.