The COVID-19 pandemic threw a wrench into many American lives in so many ways. At one point or another throughout the year, most found themselves the recipient of some type of stimulus payment, unemployment benefits, or relief from loan payments. While these benefits were welcome at the time, they can also mean a more complicated tax bill when the time comes to pay Uncle Sam.
Luckily, if you are a little late in filing, the IRS has extended the tax deadline for the 2020 year to May 17, 2021. To get information straight from the source, visit the IRS website. Or, for some of the quick highlights, keep reading.
Taxes on stimulus and unemployment
If you were lucky enough to receive the three stimulus checks throughout the year, you do not have to worry about paying taxes on them. The federal government is not treating these checks as income. However, if you were laid off due to COVID-19 and went on unemployment then this money is treated as taxable income and you will need to pay taxes on it.
This is because the government views unemployment benefits as a source of income just like they view income that you earn from your job.
If you have been collecting unemployment then you can expect a tax bill. This is an issue this year because unemployment benefits were extended through much of the year and many received many thousands of dollars in benefits.
Did you withdraw from a retirement account?
To make ends meet, many families chose to withdraw money from their retirement accounts as opposed to going on unemployment. This may have been necessary at the time to keep people above water, but withdrawing money from a retirement account before you reach a certain age will usually result in an IRS penalty of 10%.
Luckily, the CARES Act , signed by former president Donald Trump in March of 2020 allows you to withdraw up to $100,000 without paying this penalty.
That said, even though the early withdrawal fee is being waived, this money is still treated as income and will be taxed. The rules for taxation are slightly different depending on whether you used a 401(k) or an IRA and we’d recommend speaking with a professional to learn more.
COVID-19 had many of us scrambling to make ends meet this year. If you’re like most people you may have found yourself laid off, furloughed, on unemployment, collecting stimulus checks, freelancing, working part-time, or getting your side-hustle on as a gig worker.
All these situations have different tax implications and can complicate filing. To make sure that you are taking advantage of as many write-offs as you can, we would recommend working with a professional. Even if you don’t consider yourself a high-earner, you may fare much better this year by hiring a professional instead of using a free software like TurboTax. Pros know how to claim all the deductions you are entitled to, while trimming the likelihood of an audit.
If you find that you owe more than you can afford, contact the IRS. If you owe more than $10,000, call the Tax Relief Helpline to discuss your options for reductions and payment plans. That number is 888-452-7841.
What if I never received a stimulus check?
In total, there were three stimulus checks sent out over the course of the year. They were released either through direct deposit or a paper check in the mail. These were sent out shortly after the legislation was signed and were delivered based on tax information from 2019.
Although these should all have been delivered by now, there is always a chance that yours got lost in the shuffle or delivered to an old address.
One option you have if you never received one of the stimulus checks, is to claim a 2020 Recovery Rebate Credit when you file your taxes.
This credit will replace your stimulus check in the form of a tax rebate. This may also apply to you if you were a student during 2019 and your parents claimed you as a dependent, but now you are filing for yourself.
The high expense of penalties and interest if you owe tax
Keep in mind that when it comes to taxes it’s always best to try and pay the exact amount that you owe and be honest and forthcoming as it relates to your income. When in doubt, in my opinion, it’s better to overpay than underpay. If you overpay your taxes, then you will likely be issued a refund to make up the difference. However, if you under-report the proper amounts earned and it comes up, then you can be charged significant penalties and interest. The IRS is still the most effective collection agency in the country. They have the power to seize assets. It’s a good idea to stay in front of your tax concerns. Be proactive, not reactive.
Scammers are impersonating IRS agents and calling and texting taxpayers. Since this year was so different with all the gig-working and all, more Americans may fall for these scare tactics and send money to these nefarious groups. Please remember and share with your loved ones, the IRS does NOT text or call anyone who owes back taxes. They will send a letter in the mail. If you receive a call threatening you with arrest, it is a scam. You cannot be jailed, just for owing tax. Just hang up.
Teddy Stavetski is a freelance writer on financial topics.