Tax Tips for Trying Times

The last thing you probably want to think about during the pandemic are your taxes, but 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. And with tax filing deadlines extended, you may still have time to take some steps that can improve your bottom line.

First, here are changes to tax filing deadlines according to the IRS. Be sure to check the website for the latest information.

Tax Filing Deadlines

  • The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Federal income taxes on April 15, 2020, are automatically extended until July 15, 2020. This relief applies to all individual returns, trusts, and corporations. This relief is automatic, taxpayers do not need to file any additional forms or call the IRS to qualify.
  • This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020.
  • Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. You will automatically avoid interest and penalties on the taxes paid by July 15.
  • Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.

State taxes. Note that state filing deadlines may differ from the federal extensions indicated above. Be sure to visit the Department of Revenue website for the state you live in for the most current information.

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.

Unemployment benefits. 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 need 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.

Charitable contributions. 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.

10 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.
  1. 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.
  2. Tap your HSA. Under new rules, you can use your tax-advantaged HSA to purchase nonprescription medications. Also, some telehealth services may be covered until the end of 2021 without charge before you meet your plan deductible.
  3. 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.
  4. Don’t wait to file if you’re due for a refund. Just because the tax deadline has been extended doesn’t mean you have to wait — and you shouldn’t delay if Uncle Sam owes you money.
  5. 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.

Sources

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