The coronavirus pandemic has impacted everyone’s livelihoods in the year 2020. Many people have struggled with their health and their finances as government restrictions attempted to control the virus’s spread. With tax season just around the corner, many are now wondering how the pandemic affects taxes.
Thankfully, new measures were put in place in March to help support those in need and stimulate the economy. The CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act, is a $2 trillion aid package created to help ease the burden on many people who had been negatively affected. Here is how it might affect your tax.
RMDs
RMD stands for Required Minimum Distribution. It refers to the amount of money that must be withdrawn from a retirement account to avoid tax consequences. This must be done by qualifying individuals on an annual basis and from every relevant account—even if you have multiple retirement accounts.
As of 2020, the age for withdrawing from your retirement fund has changed from 70.5 years old to 72 years old. However, as of March 2020, the CARES act’s introduction has suspended the requirement for RMD withdrawals for the current year. This gives those accounts time to recover and provides a tax break for qualifying individuals.
Charitable Deductions
The US economy is a major contributor to charitable organizations such as churches, healthcare groups, foundations dedicated to feeding the hungry, and many other non-profits. Due to the pandemic, many of these charitable organizations are struggling and are in need of relief. The CARES Act provides this relief in the form of a charitable tax deduction for qualifying individuals, encouraging people to do good and in return the pandemic affects their taxes positively.
For the tax year beginning in 2020, the CARES Act allows a deduction of $300 for eligible individuals who contribute to charitable organizations. This only includes amounts up to $300. Charitable contributions that exceed this limit cannot be carried forward to future tax years. Furthermore, contributions made before this year will not be eligible.
Stimulus Checks
Stimulus checks are money that taxpayers receive from the US government to help stimulate the economy by providing some spending money to help the economy recover. In 2020 stimulus checks have been distributed to encourage spending and to help with everyday costs. Some people may be wondering whether this government money is taxable and needs to be put through the books.
According to tax experts, stimulus checks are not taxable by the IRS. The checks are more like a non-taxable grant designed to boost consumption and drive revenues. Any changes to your stimulus payments are likely to work in your favor, according to experts. If mistakes are made in your grant calculation, it may be factored into a future grant payment.
Unemployment
The pandemic has been devastating to the economy. It has caused the closure of small businesses and a high number of job losses. As unemployment soared, the US government fulfilled its duty to provide economic assistance to citizens in need. Regardless of whether you were employed, unemployed, self-employed, or an employer, the CARES Act essentially provided relief opportunities for all types of workers.
If you lost your job due to the COVID-19 pandemic, you would have been entitled to up to an additional $600 per week in unemployment compensation, on top of what you were already receiving. If you were self-employed or worked independently, you were previously not entitled to unemployment benefit, but that changed under the CARES Act. This aspect of the pandemic affects taxes for many people as this extra amount is taxable, and 2020 tax returns will reflect that.
Student Loans
The burgeoning impact of student loan debt is a concern to those in full-time education as well as employers and their employees. Until recently, it was not possible for employers to contribute to student loan repayments without incurring a tax.
But that, along with some other benefits to students, has changed under the CARES Act. Employers wishing to contribute to student loan repayment can now provide up to $5,520 to students, interns, or employees for educational expenses. An expert in business accounting can provide further information on this aspect.
The pandemic continues. Until there is a vaccine, and possibly beyond, without doubt, the effects of the pandemic will be felt for years economically. The CARES Act, introduced in March, is likely to ease some the difficulties caused by the pandemic and stimulate the economy. It’s a necessary act, but while it does much, it may need to be adapted as circumstances change.
In relation to taxes, the CARES Act is proving beneficial to those in need who qualify. If you are unsure whether a CARES Act policy affects your tax, contact the IRS or a qualified accountant for further details.
Contact us at Insogna CPA for help navigating the upcoming tax season.