This year has probably been one of the most challenging times of our lives – and our financial situation makes no exception. Now we’re all looking forward to ending 2020, but what does 2021 have in store for us in terms of our taxes?
Staying informed is the first step towards getting ready for the incoming tax season. Today, we’ll have a look at some of the most important aspects regarding tax deductions, as well as special financial programs for those of us affected by the coronavirus pandemic.
Ready? Let’s have a look:
COVID-19 and your taxes
While it’s true that now we know more about the coronavirus than ever and we even have a vaccine for it, the economical impact of the pandemic will continue to affect us throughout 2021 as well. Luckily, the government is preparing a series of solutions to help those in need.
Here are the main aspects you should know:
Stimulus checks
The government has decided to send up to $1,200 as a stimulus check to millions of Americans right after the pandemic forced most states to impose lockdowns. The initiative has been part of the Coronavirus Aid, Relief and Economic Security Act (CARES).
What’s important to know is that this stimulus check will not be counted as a taxable income; instead, it’s considered to be a refundable tax credit. In simple terms, this stimulus check is like if you would’ve received a portion of your 2021 tax refund in advance.
Paycheck Protection Program (PPP) Loans
The same CARES act which developed stimulus checks has also developed a program to help small businesses. With the Paycheck Protection Program, or PPP, small business could make loans for business expenses such as utilities, mortgage payments or rents. You can also help yourself if check this guide on how to make fake pay stubs.
These loans would be ‘forgiven.’
However, note that anything you’ve paid for with money from a PPP loan is not deductible from your taxable income.
Unemployment Benefits
The pandemic caused millions of Americans to lose their jobs, leading to one of the worst economical crisis in recent history. However, you should know that if you’ve received unemployment benefits, you will still have to pay income taxes on that money!
If you didn’t want to have taxes withheld from your benefits when you signed up for unemployment benefits, you have two options:
- Pay estimated taxes quarterly
- Save money from your unemployment benefits so you can pay your taxes ahead of Tax Day.
Educational Expenses (529 Plans, ESAs)
If you’ve taken any money out of a 529 plan or an Educational Savings Account (ESA), it will only be tax-free if you’ve used it for qualified educational expenses. However, since many educational institutions were cancelled or went remote due to the pandemic, your college might’ve refunded part of your 529 or ESA money.
If your school or college refunded any money, you must put it back in the account or continue to use it to cover future educational expenses. Unless you do this, you could be eligible for a withdrawal penalty.
Retirement plans: IRAs, 401(k)s and others
Retirement plans have experienced a wide range of changes this year. Knowing these differences is crucial because some of them can affect your tax bill as well this year.
Let’s have a look at the most important changes:
- According to the CARES Act, any person younger than 59 ½ can take a maximum of $100,000 out of their IRAs and 401(k)s until the end of 2020 without any additional withdrawal penalties. However, generally experts recommend you to avoid taking money out of your retirement accounts by all means.
Another important aspect here is that if you take any money out of a tax-deferred retirement account (think IRA or 401(k)), it will be taxed just as any other ordinary income. In other words, get ready to pay for any withdrawals you make from these sources. - Are you a traditional IRA owner? Great! Then, you probably already know that you must withdraw money out of your account after a certain age, withdrawals named required minimum distributions (RMDs).
The SECURE Act pushed back the age for these RMDs on traditional IRAs to 72 (compared to the initial 70 ½ ). Additionally, the CARES Act allowed retirees to skip RMDs in 2020 without any penalties. This can provide you with major benefits in terms of saving money that might help get through the 2021 tax season. - If you have a traditional IRA, you can still put money in your account even if you’re older than 20 ½. This is a breakthrough, since it allows you to lower your taxable income this year.