We won't be able to look back on 2020 without remembering the COVID-19 pandemic. It's affected our health, our finances, and virtually every other aspect of daily life. And when it comes time to pay our 2020 taxes, we'll be reminded all over again of everything we went through this year.
Some of the tax changes you'll notice are helpful and others could lead to a nasty surprise if you're not prepared. Here are four things you should know about how COVID-19 can affect your tax bill this year.
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1. Your tax bill might be higher or lower than usual
Millions of Americans are out of work and living on unemployment right now, which means their annual income is probably going to be quite different from years past. If you're earning less on unemployment than you're used to, you could have a lower tax bill this year, especially if you end up in a lower tax bracket than normal.
But if you are one of those who is making more on unemployment than you did working, you could owe more in taxes than you're used to paying. That doesn't mean you'll have to give money back to the government at the end of the year, though that's possible. You may just get a smaller refund check.
It's difficult to predict exactly what your income will be for the year right now, but keep an eye on this as you near the end of the year and check which tax bracket you expect to fall into. If you're on the edge of a tax bracket, you might try stashing some money in a tax-deferred retirement account to keep yourself in the lower bracket so you lose a smaller percentage of your income to the government.
2. Self-employed individuals have more time to make some of their estimated payments
Normally, self-employed workers must make estimated tax payments on the 15th of April, June, September, and January of the following year, unless any of those days fall on a weekend, in which case it's moved to the next Monday. But in light of COVID-19, the government has moved these deadlines, allowing self-employed workers to wait until July 15, 2020, to make their first two estimated tax payments.
You don't have to wait until then if you're able to pay now, but it's a nice option to have if money has been tight for you due to the pandemic. As of now, the deadlines for the third and fourth estimated tax payments remain the same.
3. You can deduct some charitable contributions without itemizing expenses
In past years, you could only claim a tax deduction for charitable contributions if you chose to itemize your deductions. This meant the taxpayers who chose the standard deduction because it saved them more money didn't get credit for their charitable giving. The CARES Act changes that, at least for this year.
You can now claim a charitable-contribution deduction of up to $300 even if you choose the standard deduction this year. This only applies to individuals who actually made a charitable contribution in 2020, and $300 is the maximum deduction. If you didn't contribute at least that much, your deduction will be equivalent to your contribution.
Only contributions to qualifying nonprofit organizations count. You can use the IRS' tax-exempt organization search tool to find one of these. Keep your receipt to prove that you made the contribution. You don't have to submit this with your taxes, but you'll need it if the IRS audits you.
4. Retirement account withdrawals won't hurt as much
The CARES Act has removed the 10% penalty on retirement account withdrawals if you're under age 59 1/2. It also allows you to spread the tax liability out over three years, rather than paying taxes on your whole withdrawal in 2020. So you could withdraw $3,000, for example, and pay taxes on $1,000 of that amount this year, another $1,000 next year, and another $1,000 the year after.
You don't have to put the money back into your retirement account if you don't want to, but there are incentives to do so. One, you'll give yourself a better shot at saving enough for a comfortable retirement. Two, if you're able to pay back some or all of what you took out over the next three years, you can file an amended tax return for 2020 and recoup the money you paid in taxes on your distribution, so it's almost like you didn't take money out at all.
You don't have to file your 2020 taxes for a long time, but the decisions you're making right now will affect them. It pays to understand how COVID-19 is changing the rules this year so you know what to expect and can take advantage of these tax-saving opportunities while they're around.
