Top 5 ways coronavirus impacts could affect your taxes
2020 has been a year unlike any other. While the economic shutdown affected people in an instant, the financial repercussions for many will be lasting — taxes are no exception. Why talk about next year’s taxes now? It’s about arming you with information upfront, so you can prepare or take action now. We’re here to help you understand the ways coronavirus impacts can affect your taxes.
In this article, we list the top concerns many have, so you can be more prepared. Plus, we’ll explain what actions you could take now.
Before we jump in, let’s cover the stimulus payment. The good news is you won’t need to report anything special on your return, but you should keep your Notice 1444 from the IRS for your records.
What about a change in income or other life changes that affected your stimulus eligibility? If you received less stimulus money than you should have, you should receive the difference when you file your 2020 return in most cases. Don’t worry if you received too much; you won’t have to pay it back.
Now, with the stimulus question addressed, let’s look at five common situations borne out of the pandemic and review the corresponding coronavirus tax impacts.
Coronavirus tax impact #1 – Claiming unemployment
Americans are claiming unemployment in higher numbers than ever before. If you’ve never collected unemployment benefits, you might not realize that the income is taxable – not just on the federal level, but on the state level too in most states.
When tax time rolls around, you’ll need to include that income on your tax return. How will you know what to report? Your state will send you Form 1099-G, which will show the amount of unemployment compensation paid to you during the year. If you repaid a portion of the benefits received, you can reduce the benefits received by the amount repaid.
What you could do now: If you’re still receiving benefits, you can choose to withhold so you’re paying some of those taxes as you go vs. all at once at tax time. At the federal level, you can only withhold at a flat rate of 10%. The withholding rate for state taxes will vary based on each state.
The following 15 states don’t tax unemployment income: Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington and Wyoming.
Coronavirus tax impact #2 – Taking on multiple jobs
Taking on extra jobs or taking on a temporary job to make up for lost hours can help keep up your cash flow. However, this change in work due to coronavirus will also impact your taxes. Here’s why: More jobs mean more complex income tax withholding (the money held out from your paycheck).
Think of your withholding as a careful balance between more take home pay or a potentially bigger tax refund. When you add other jobs to the mix, the balancing act gets trickier.
That said, you need to have your W-4 forms completed correctly to ensure you don’t have a surprise at tax time. You can update your paycheck withholdings by completing new W-4 forms.
If you’re doing contract work (where you don’t receive a W-2), you should make quarterly estimated payments to keep on top of your tax obligations as these jobs don’t withhold any money for taxes.
What you could do now: Luckily, we have a W-4 calculator that lets you account for multiple jobs for you (and your spouse) – even if you’re no longer working at one of the jobs. After you answer a few questions and enter your information, you’ll complete the process with a new W-4 to take to your employer.
Coronavirus tax impact #3 – Receiving relief for student loans
If you’re one of many taxpayers with a student loan, the CARES Act may have provided temporary help through the financial crunch in two ways. For up to six months, the legislation:
- Let you skip principal payments on certain student loans without any negative effects to your credit score or lending report.
- Dropped interest rates for federally held loans to 0%, regardless of their status.
So, how will this coronavirus change impact your taxes? You might remember from previous tax filings, that your student loan interest payments also let you take a student loan interest deduction. The math on this is fairly straightforward: If you paid less in interest, you’ll have a smaller deduction amount.
What you could do now: As the September 30 expiration date is around the corner, it’s important to be ready to make payments again. Failure to do so can mean wage and tax refund garnishment. If your payments were automatically suspended, you’ll want to check that they’ll also automatically start up.
Coronavirus tax impact #4 – Giving to charities
Did you make a cash donation this year, or are you planning on making one? Normally, only those who itemize deductions can take a deduction for charitable giving. After Congress passed the CARES Act, a charitable giving deduction is available even if you use the standard deduction.
Here’s how it works: You can lower your taxable income with an “above-the-line” deduction of up to $300 for cash gifts to charity (exceptions apply, such as donations to donor advised funds).
For those who do itemize deductions, the CARES Act also may impact your deduction. The legislation increased the deduction limit from 60% of your Adjusted Gross Income (AGI) to 100% of your AGI. The increased amount only applies to cash donations.
What you could do now: Be sure to retain records for any cash donations and save these with your tax filing documents.
Coronavirus tax impact #5 – Suspending mortgage payments/experiencing foreclosure
Losing your job can have devastating effects on your ability to make home loan payments. Depending on your situation, you may have sought to suspend mortgage payments, or possibly had to foreclose on your home. Both situations can trigger tax consequences you’ll want to prepare for.
Suspended mortgages – Thanks to the CARES Act, borrowers who lost income and had federally backed mortgages were able to delay payments for up to 180 days (with extensions up to 360 days). The change also allows homeowners to avoid penalties and hits to their credit scores during the deferral period.
While this provision gives you a break from payments due to the coronavirus crisis, it could also have an impact to your taxes.
- Real estate taxes may still be due – For many people, property taxes and insurance paid into an escrow account make up a portion of their total monthly payment. Check with your mortgage servicer to find out what happens to scheduled payments for real estate taxes and property insurance from your escrow account. Missing that tax payment can put you in further jeopardy as the delinquent amount becomes a lien on your home.
- Less interest paid, means a smaller deduction – If you choose to itemize your deductions, you’ll have a smaller mortgage interest deduction to count toward your itemized total. If it lowers your deduction enough, it may be better for you to take the standard deduction vs. itemizing when you file.
Foreclosure and debt cancellation – Having your home repossessed due to foreclosure or your mortgage debt cancelled is not the end of the story where taxes are concerned. Unfortunately, cancelled debt from your home foreclosure might be considered taxable income. In many cases, however, you can qualify for an exception and exclude the canceled debt from your income.
What you could do now: In this case, there’s unfortunately not much you can do at this point to mitigate these taxes. But, hopefully, knowing that you may have this tax obligation coming can help you better plan for these expenses at tax time.
Planning for the ways coronavirus will impact your taxes
Tax implications are tied to so many facets of our financial lives. We tend to say that if you’ve had any life changes, you’ll likely have a change to your tax situation. That’s especially true during these last few months. But, take heart —you don’t have to figure it out on your own. That’s why we’re here.
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