The 2020 tax filing season is well underway with the deadline to file reverting back to the traditional date of April 15 after the IRS extended the deadline to July 15 last year due to the coronavirus outbreak.
While your taxes are probably the last thing you want to think about during the ongoing pandemic, it’s important to do so. In a new financial reality where many things are outside of your control — including job loss and unpredictable stock performance — your taxes are something that you can affect. Here are some steps to consider that can improve your bottom line.
Hardship 401(k) withdrawals
While the CARES Act loosens restrictions for tapping your 401(k) funds during the crisis, such as waiving the early withdrawal penalty for qualified applicants, your distributions will still be taxable, so it’s important to plan for that tax bill.
If you’re receiving unemployment benefits, it’s important to realize that those benefits are taxable. Some may mistakenly assume they’re not because no taxes are withheld from the payments they receive. You can, however, elect to have taxes withheld from your benefits to avoid a larger tax bill next year.
Document childcare costs
If you needed to hire childcare while schools are closed, you may be eligible for the childcare credit even if family members are minding your little ones. Consult a tax professional to determine what expenses qualify and what documentation you’ll need to provide.
Be aware of which charitably intended contributions are actually tax deductible according to Uncle Sam. You may be making donations to Go Fund Me pages and charitable organizations, but your contributions may not be tax deductible in the eyes of the IRS. So be sure to do your homework before you write your check so that you fully understand the tax implications of your gift.
It’s advisable, during these unprecedented times to always seek out the counsel of a qualified tax advisor who can assess your particular circumstances and advise you accordingly.
9 Pandemic Tax Tips
1. Unemployment benefits are taxable. That may not be obvious from the checks you receive, so be sure to budget accordingly.
2. Withhold taxes from your state unemployment benefits. Ask about this when you enroll as it can help you lower your tax bill later.
3. Public assistance programs are generally not taxable. Food stamps (SNAP), for example, should not impact your taxes, but ask about all services that may be available to you and whether or not they’re taxable.
4. Gifts to you are also generally not taxable. The giver, however, may be responsible for paying taxes.
5. You may be able to take back your IRA contribution. IRA contributions and dividends earned that are returned before the due date of your tax return can be withdrawn without penalty. Doing so, however, will also lead to forfeiting the tax deduction.
6. Deductible insurance payments. You may be able to deduct the cost of insurance premiums you are paying out of pocket, including your COBRA costs, if they exceed 10% of your adjusted gross income.
7. Tap your HSA. CARES Act, you can use your HSA funds to buy over-the-counter medications without a prescription, including pain relievers, heartburn medications, allergy relief and more Also, some telehealth services may be covered until the end of 2021 without charge before you meet your plan deductible.
8. You may now qualify for the EITC. Your income may have previously disqualified you for the Earned Income Tax Credit, but you might now be eligible if you have lost your job.
9. Seek professional advice. With so much in flux financially right now, it’s advisable to consult with a qualified tax professional to see what credits and deductions you may qualify for during the pandemic.