How COVID-19 Could Affect Your Taxes

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COVID-19 Could Affect Your Taxes 

The COVID-19 outbreak has had dramatic effects on our health, finances, businesses, and almost every aspect of our daily lives. Even when the actual pandemic subsides, the financial and tax impacts will continue.

Many of these impacts could come as an unpleasant surprise to taxpayers during the next tax filing season.  

In this blog post, we highlight many COVID-19 items relevant to 2020 tax return planning and outcomes. 

Unusually High or Low Tax Bills 

The pandemic left many Americans jobless, forcing many to collect unemployment benefits and to try different things to survive. For many taxpayers, personal taxable income decreased considerably from recent prior years. In some cases, the extent of the income decline will plunge taxpayers into lower, more favorable tax brackets.

In addition to unemployment benefits, many taxpayers received other COVID-related government financial assistance such as PPP loans, SBA debt relief, SBA disaster loans, state aid, and other forms of relief. Some of these assistance programs will affect taxpayers’ income taxes for 2020 and future years.

To further understand the impact of these items on your tax filings, we strongly encourage you to connect soon with your trusted Verdant tax professional.

2020 Estimated Tax Payments

In a more typical year, self-employed persons may pay their estimated taxes by April 15, June 15, September 15, and January 15 of next year. 

The federal government and many state governments extended the 2020 estimated tax payment deadlines to offer taxpayers further COVID relief. For clients who make estimated tax payments, please be aware of the different 2020 payment deadlines as you are reviewing your financial records and reporting your payments to us during tax filing season.

The deadline for fourth-quarter payments remains the same—January 15, 2021. Time still remains to prepare and pay those estimates, if necessary.  Please consult with our office for assistance projecting your 2020 taxes and preparing final Q4 vouchers.

Special Charitable Contribution—Even for Those Who Don’t Itemize

In the past, charitable contribution deductions could only be claimed by taxpayers who itemized their personal deductions. Since passage of the Tax Cuts and Jobs Act (TCJA), however, fewer taxpayers are now able to itemize.

The tax year 2020 will be an exception! As part of the CARES Act, the government is permitting all taxpayers to deduct up to $600 in charitable contributions ($300 for single or married filing separately). Taxpayers who itemize may, of course, still deduct even more in charitable contributions.

Consequently, we are strongly encouraging all our clients to take advantage of this limited-time special deduction. Contributions eligible for the 2020 deduction must be made by 12/31/20.  

Coronavirus-Related Retirement Account Withdrawals and Loans  

The CARES Act allows eligible individuals adversely impacted by COVID-19 to withdraw or borrow money from retirement accounts. Such disbursements can be eligible for favorable tax treatment.

Among the favorable tax provisions—taxpayers do not need to pay 100% of the related taxes in the year of distribution. Rather, tax on the distribution is spread out across three years.

Please let our office know if you are considering or have taken such a distribution for 2020. This unusual item could be significant to many taxpayers’ tax planning and 2020 tax outcomes.

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