The CARES Act, passed in response to the economic turmoil caused by COVID-19, sought to provide economic support to millions of Americans. This support included some provisions that may affect your 2020 income taxes. Read on to learn five ways that the CARES Act could affect your taxes.
Impact #1: Stimulus Checks & Tax Credits
Millions of Americans received stimulus checks during 2020 and early 2021 - the first for $1,200 ($2,400 for married couples) and the second for $600 ($1,200 for married couples). These stimulus checks were also referred to as Economic Impact Payments. According to the IRS, if you did not receive these payments (and were eligible to do so) then you may be able to use them on your 2020 tax return as dollar-for-dollar tax credits. There are a few requirements you must meet:1
- Be a U.S. citizen or resident alien during 2020
- Not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
There were income limits on both payments, which were based on 2018 or 2019 tax returns. If you were entitled to more than you received, you may be able to claim the amount missing as a “Recovery Rebate Credit” on your 2020 tax return. Also, if your income declined in 2020 and your lower income would have qualified you to receive more in stimulus payments than you actually received, that also may allow you to claim the difference as a Recovery Rebate Credit on your 2020 return.
Impact #2: CARES Act & Retirement Accounts
The CARES Act allowed individuals with a 401(k), 403(b), 457(b) and Thrift Savings Plan to withdraw their funds without incurring the standard 10 percent penalty on early distribution.2 Instead, these withdrawals were considered coronavirus-related distributions.
If you chose to take a withdrawal during 2020, your taxes will be impacted as follows:2
- The distributions will count as income, taxable over a three- or one-year period, depending on your choice.
- Distributions can be repaid before the end of the three-year period to receive a refund on the taxes that were paid as a result of the distributions.
Impact #3: Charitable Gift Deductions
Deductions for charitable donations reduce taxable income, and therefore, taxes. However, in order to deduct charitable contributions, you must itemize deductions. Under the latest tax law, the standard deduction is so large that far fewer taxpayers are itemizing their deductions. The CARES Act provided a small incentive to encourage Americans to be charitable by allowing filers who use the standard deduction to benefit from charitable donations as well. Even taxpayers taking the standard deduction may now deduct $300 of cash donations on top of their standard deduction.3
Impact #4: Unemployment Benefits
Under the CARES Act states are permitted to extend unemployment benefits by up to 13 weeks under the Pandemic Emergency Unemployment Compensation (PEUC) program.4 Unemployment benefits are normally considered taxable income, but the $1.9 trillion federal coronavirus relief package passed by the Senate a few days ago may make the first $10,200 non-taxable.5
Impact #5: Tax Benefits for Business Owners
Business owners received two main benefits through the CARES Act, the Credit for Sick and Family Leave and the Employee Retention Credit.5 There are a few other, less well-known CARES Act business tax benefits. For example, business net operating losses (NOLs) from 2018, 2019, and 2020 can now be carried back up to five years. (The 2017 tax law eliminated the previous carryback provision.) Also, the cap on personal deductions for business losses was eliminated for 2018 through 2020.6
2020 was a challenging year, and incorporating all of the tax law changes that have taken place recently (and still are taking place with retroactive effect!) will also be a challenge. Perhaps more than ever before, it may be advisable to get help from tax software, and perhaps also from a tax professional.
This content is developed from sources believed to be providing accurate information, and provided by Sapient Investments. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.