Looking Ahead to Looking Back at 2020
Now that we're in November, the crazy year 2020 is at an end. The variety of economic relief that various individuals and businesses may have seen this year presents a unique challenge as tax season approaches. Of course, as the pandemic continues and tax and relief programs evolve, more options or changed rules may be offered that could further bolster the relief you have - and potential tax consequences to consider.
Here are some programs and benefits that you need to consider and keep in mind as you begin to put together your taxes for 2020:
- Economic Impact Payments (EIP) - You (and your spouse) may have received $1200 via check or direct deposit. Also, children in your household may have received $600. Even if you didn't but are going to be eligible in 2020, this may be a tax credit
- Unemployment - if you or someone in your household received unemployment, note that these compensation payments are taxable income. Be sure to note that when you're gathering 1040 documents, as a tax form should be issued. Plus, withholding may be different than expected, so you could be in line for more tax due than usual.
- Special Charitable Donation Deduction - The CARES Act does permit a special above-the-line $300 deduction when related to COVID function. So, even if over the last couple of years you did not get to itemize due to the increased standard deduction, this year may be different. Make sure to gather donation receipts from the charities.
- Paycheck Protection Program (PPP) - Businesses (including self-employed, contractors, etc) may have received the heavily utilized, often re-defined PPP loan, which is unlikely to be paid back, depending on your circumstances. Note that at the time of this writing, expenses related to the PPP are NOT deductible. As this may change, stay up-to-date as Congress/SBA/IRS fine-tune the guidelines.
- Economic Impact Disaster Loan (EIDL) - Businesses that received this loan may have tax implication depending on the advance. While the loan was a lifeline for entities that needed cash to cover operating expenses, be sure to include balances, any interest paid, any advances, and other details as you gather tax info.
- Capital Gains/Losses - As the stock market went up and down, harvesting tax losses or utilizing relatively low capital gains rates (especially if your other income is down) means tax planning is critical to optimize your investment strategy.
- Required Minimum Distributions (RMD) - RMDs were not mandatory in 2020. This means many retired individuals may have some opportunities to implement some tax planning before the year is over.
- Early IRA Withdrawal due to COVID - If you took an early distribution from a retirement account, and the reason is COVID-related, you may be able to spread out the tax impact over multiple years.
- Alabama CARES Funds - Entities such as business (Revive), non-profits, faith-based organizations, healthcare providers, and more saw Alabama make available certain CARES Act funding via a variety of grant programs administered by ALDOR and ALDOF. If you received one, it's likely a taxable event.
- Payroll Tax Holiday - If your employer was one of the ones that elected to defer payroll taxes on your paycheck for the remainder of 2020, brace yourself for when the payback is resumed in 2021.
- Remote Work - If you worked from home, and your home site is a different state than your normal office site, you may have state tax implications - either positive or negative - that could arise at tax time.
Even in light of the several programs above, be sure to stay tuned as more potential relief is granted for both individuals and business, not only from the federal government but also from the state.