Life Changes and Your 2020 Tax Return

Last year’s changes may
affect your tax return.

On February 12, the IRS began processing 2020 tax returns. This year for the first time, Form 1040 and Form 1040-SR are available in Spanish. There are also some other changes and some special circumstances related to COVID-19 that you should think about before filing.

People facing financial difficulties may find that there’s a tax impact on certain events, such as job loss, debt forgiveness, or tapping a retirement fund. In addition, the information on your 2020 tax return may look different from your 2019 tax return. There’s a “What Ifs” for Struggling Taxpayers page on IRS.gov outlining some scenarios that may have a tax impact on families.

Understanding how last year’s changes affect you and your tax return is important. This article explains what you need to know about filing a complete and accurate tax return, claiming credits and deductions, getting a refund timely, and meeting tax responsibilities.

File a Complete and Accurate Return Electronically to Avoid Refund Delays

Organize your tax records to make preparing a tax return easier. The safest and most accurate way to file a tax return is to file electronically. About 90% of individuals are expected to file federal returns electronically. E-filed returns have fewer errors, which means fewer delays.

Unemployment Benefits Are Taxable

Millions of Americans received unemployment compensation in 2020. For many, it was the first time receiving these benefits. These taxpayers may be unaware that the money received through this program is taxable income. Unemployment benefits are taxable income if the benefits are received under the unemployment compensation laws of the United States or of a state.

This includes that extra $600 per week individuals might have received in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for in the Federal Pandemic Unemployment Compensation program.

If you received unemployment compensation in 2020, you should receive Form 1099-G, Certain Government Payments, showing the amount paid in Box 1 and any federal income tax you elected to have withheld in Box 4. The IRS will receive a copy as well. Some states do not mail Form 1099-G. If your state does not mail the form, you will need to get the electronic version from your state’s website.

Gig Economy Work is Taxable

The gig economy is an activity where people earn income providing on-demand work, services, or goods. Often, it’s through a digital platform like an app or website. Individuals must file a tax return if they have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time, or temporary.

Refund Interest Payments Are Taxable

In general, the IRS paid interest on individual 2019 refunds on returns filed by July 15, 2020. The interest covered the time from April 15, 2020, until the date of the refund. These refund interest payments are taxable, and taxpayers must report the interest on their 2020 tax return. You will receive a Form 1099-INT on interest over $10 paid in 2020.

Check Eligibility for Tax Credits

With changes to income and other life events for many in 2020, tax credits and deductions can mean more money in your pocket. Thinking about eligibility before filing can help make tax filing easier.

Certain credits may lead to a refund even if you owe no tax. You may find that you’re newly eligible for certain tax credits, such as the Earned Income Tax Credit (EITC) or the Recovery Rebate Credit.

Now more than ever, you need to check and see if you qualify for credits and claim them when you file. You can use the IRS Interactive Tax Assistant to help determine if you are eligible to claim certain credits and deductions. You must file a federal income tax return — even if you aren’t otherwise required to file — and specifically claim certain credits.

Earned Income Tax Credit Eligibility

The EITC is the federal government’s largest refundable federal income tax credit for low- to moderate-income workers. If you qualify, you can use the credit to reduce your taxes owed – and maybe increase your refund. For example, the EITC is worth as much as $6,660 for a family with three or more children or up to $538 for taxpayers who do not have a qualifying child.

If you have earned income from working for someone or running a business or farm, it’s money that can positively change your life, family, and community. Four out of five eligible taxpayers receive the EITC. This means millions of taxpayers are putting EITC dollars to work for them. But missing that one in five means millions of people are not taking advantage of this valuable credit they earned. Almost a third of those who qualify for EITC qualify for the first time this year due to changes in their marital, parental, or financial status.

There’s a new EITC rule that can help people whose income was less in 2020 than 2019 or who received unemployment income that cannot be used to qualify for the EITC. A person may elect to use their 2019 earned income to figure the Earned Income Tax Credit if their earned income was more in 2019 than in 2020. This change may help workers get bigger tax credits and larger refunds when they file their 2020 tax returns this year. Taxpayers should use their 2019 earned income if it helps them qualify for more EITC.

Taxpayers earning $56,854 or less can see if they qualify using the EITC Assistant, available in English and Spanish. The tool helps determine eligibility, qualifying children, and estimates the amount of the EITC a person may get. If an individual doesn’t qualify for the EITC, the Assistant explains why.

Additional Child Tax Credit (ACTC) Eligibility

The ACTC is for certain individuals who get less than the full amount of the Child Tax Credit. Like the EITC, when filing a 2020 tax return, individuals may be able to use their 2019 earned income to figure the ACTC if their earned income was more in 2019 than in 2020. Again, it is typically better to choose the option that results in the larger credit.

Identity Protection PIN Available Nationwide

New this year, all taxpayers can voluntarily opt into the IP PIN program by using the Get an IP PIN tool at IRS.gov/ippin. The six-digit IP PIN prevents identity thieves from filing a tax return with your Social Security number. This adds an extra layer of protection for you against tax-related identity theft by requiring the PIN you create to be used when your tax return is filed electronically. You must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if they also can pass the identity proofing process. You can review what is needed to verify your identities at IRS.gov/secureaccess.

Cash Charitable Contribution Deduction Without Itemizing

If you choose the standard deduction, you may be eligible to take a charitable deduction for cash contributions up to $300 made to qualifying charities in 2020 without having to itemize. The deduction lowers both adjusted gross income and taxable income – translating into tax savings for those who made donations.

IRA Contributions After Age 70½

For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs. You can make tax-deductible IRA contributions past age 70½. In addition, you may be able to claim a deduction on your individual federal income tax return for the amount contributed to the IRA. See IRA Deduction Limits. You can make contributions to IRAs until April 15, 2021, and still deduct that amount on your 2020 tax return, if eligible.

Also, some taxpayers found it necessary to take coronavirus-related early distributions from 401(k) plans and traditional IRAs in 2020. Under the CARES Act, those distributions – up to $100,000 – are not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

Recovery Rebate Credit and Economic Impact Payments

Economic Impact Payments are commonly referred to as stimulus payments. Economic Impact Payments were based on a taxpayer’s 2018 or 2019 tax year information. The Recovery Rebate Credit is similar except that the eligibility and the amount are based on 2020 information on a person’s tax return.

Economic Impact Payments were issued to eligible individuals in two rounds – the first payment was $1,200 per adult plus $500 for each qualifying child, and the second payment was $600 per adult plus $600 for each qualifying child. These payments are not taxable.

The Recovery Rebate Credit is a tax credit against the 2020 income tax. Generally, the Recovery Rebate Credit will increase the amount of a tax refund or decrease the amount of the tax owed on a 2020 tax return.

Most people who are eligible have already received the full amount for the Recovery Rebate Credit as Economic Impact Payments. If you received the full amount for both Economic Impact Payments, do not include any information about it when you file your 2020 tax return.

A change in income could make you eligible for the Recovery Rebate Credit.

For example:

Some people may have received less than the full Economic Impact Payments because their incomes were too high in 2019; they can claim the Recovery Rebate Credit based on 2020 income.
Or, if a person was claimed as a dependent on someone else’s tax return in 2018 or 2019 but cannot be claimed as a dependent on someone else’s return in 2020, they may now be eligible for a Recovery Rebate Credit.

If you are eligible and either didn’t receive Economic Impact Payments or think you qualify for more than you received, you can claim the Recovery Rebate Credit when filing your 2020 tax return. You must file a 2020 tax return to claim the Recovery Rebate Credit even if you are not normally required to file.

New Schedule LEP, Request for Change in Language Preference

This tax season, you can use the new Schedule LEP to state a preference to receive written communications from the IRS in a language other than English.

View Tax Account Information Online

You can access your account online to view any amount owed, payment plan information, payment history, scheduled and pending payments, digital copies of select notices, and key information from your most recent tax return as originally filed.

You can also check the amounts of Economic Impact Payments through your online account. This can help accurately calculate any Recovery Rebate Credit on a 2020 tax return.

For questions about how to create an account or how to reset the username or password, see IRS.gov/secureaccess.

The IRS cannot answer refund status inquiries unless it has been 21 days since the tax return was filed electronically. That 21-day time frame begins on February 12 or when the IRS accepts the tax return, whichever is later. However, you can check Where’s my refund? on IRS.gov or the IRS2Go app for a personalized refund date as soon as 24 hours after the tax return is electronically submitted. This is the best way to monitor the status of a refund. Most early EITC/ACTC filers should see an update to WMR by February 22.

You Should File Your Return by April 15 Even If You Can’t Pay the Full Tax Owed

If you believe you may have trouble paying a tax bill by the April 15 due date, you should not panic. You should still file the tax return even if you are unable to pay in full. You should pay as much as you can to avoid penalties and interest. Filing timely is especially important because the late-filing penalty and late-payment penalty on unpaid taxes add up quickly.

The IRS offers payment options, such as a short-term extension to pay, a payment plan, an Offer in Compromise, or a request to temporarily delay the collection process until your financial situation improves. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills.

A Final Note

Many taxpayers experienced unexpected and often financially disruptive events during 2020. If you are unable to find the answers to your questions on the links provided here, contact your local tax professional.

Stay safe. Stay well. Stay home.