As if the coronavirus pandemic didn’t cause enough issues in our lives, the federal taxing authority is now grappling with a particularly tricky tax year — one that is filled with virus-related provisions that were enacted by Congress in order to boost the economy. And, on top of that, the COVID-19 pandemic has strained the agency’s resources, making it more difficult than ever for taxpayers to reach the agency to find out what they can and cannot do.
In today’s entry, we are going to be going over some of the most common questions people are asking about filing their taxes this year, as well as some deductions and credits to keep in mind when filing your taxes. Tax Day is Thursday, April 15th, 2021 — the last day that you are able to file your tax returns. So, read on to have your perplexing questions answered, and if you have any further questions, be sure to give our professional Nashville accountant a call at Beyond Basics Accounting Resources, LLC today.
Do stimulus payments count as income? And will we get a form to report these payments on our tax returns?
In short — no. Your stimulus checks do not count as taxable income, meaning you do not need to file them in your taxes. These checks are technically considered as a refundable tax credit by the IRS, basically meaning that they were an advance of a 2020 tax credit. You can also check out irs.gov to find answers to a lot of your questions regarding the stimulus payments on an FAQ page that is devoted to stimulus credit.
Are Unemployment Benefits Taxable?
This may come as a shock, but yes, unemployment insurance payments are considered to be taxable income. It is generally taxable as income at the federal level but may also be taxable at the state level, depending on where you live.
In addition to paying taxes on unemployment benefits, if you worked for a portion of the year before losing your job in 2020, you may also be responsible for paying federal income tax on those wages as well. Employers will typically withhold federal and state taxes from wages based on how much you earned as well as the information you provided on your W-4 form(s). If you are unsure about whether or not you owe any additional tax on those wages, be sure to contact a professional accountant as soon as possible who can help you ensure that you are filing your taxes correctly.
Tax Deductions and Credits to Consider
Tax deductions can help with lowering how much of your income is subject to federal income taxes. Some tax deductions are only available if you decide to itemize your deductions, while other deductions are still available even if you choose to take the standard deduction.
Tax credits, on the other hand, lower your actual tax bill dollar for dollar. There are two types of tax credits, which are:
- Refundable: If a credit is greater than the amount you owe and it is a refundable credit, the difference is paid to you as a refund.
- Nonrefundable: If it is a nonrefundable credit, your tax bill will be reduced down to zero — so while you won’t get a refund, this means you won’t have anything on your tax bill.
Here are some deductions and credits to keep in mind when filing your 2020 tax return:
If you are the kind of person who loves to give to others, we have some exciting news for you! In an effort to encourage more charitable actions, the CARES Act allows you to deduct up to 100% of their adjusted gross income (your total income minus other deductions you have already taken) in qualified charitable donations if you are planning to itemize the deductions. The CARES Act also added a new “above-the-line” deduction that will help you to write off up to $300 of charitable contributions you made in cash if you are taking a standard deduction.
If you are self-employed, there are many different deductions that you can claim on your tax return. These deductions include travel expenses, a home office deduction if you use a space in your home to work, among other things.
If you are one of the millions of workers who were sent to work from home, you, unfortunately, will not be able to claim the home office deduction as it is reserved for those who are self-employed.
If you spent some time in the hospital in 2020 or found yourself with some hefty medical bills, you may be able to find at least a little bit of tax relief. For any medical expenses above 7.5% of your adjusted gross income, you can deduct it from your taxes. For example, if your adjusted gross income was $100,000, you can deduct out-of-pocket medical expenses above $7,500 in 2020. Just be sure to itemize your deductions in order to write them off in your tax return.
Earned Income Tax Credit
Earned income tax credit is a refundable credit that is designed to help out both low- and middle-income workers. If you made less than $56,844 during the 2020 tax year, you may be eligible for this tax credit (check out the IRS website to find out more information on this).
Child Tax Credit
If you have children, you may be able to claim up to $2,000 per qualified child with this tax credit. Just be sure to keep in mind that the income limits for this credit are $200,000 for single parents and $400,000 for married couples.
American Opportunity Tax Credit
If you have children who are attending college, you can help them with staying out of student debt and catch a break on your taxes at the same time with the American Opportunity Tax Credit. This credit applies to qualified education expenses including tuition, textbooks, and school fees, covering 100% of educational expenses up to $2,000 and 25% of the next $2,000 after that.
Other Deductions and Credits
There are several other tax deductions and credits that may be available to you depending on your situation that you won’t want to miss out on! To get in the know about all of your potential savings, contact a local tax professional who can help you to make sure that you aren’t leaving any potential credits or deductions out on the table.
If you have any questions regarding this 2021 tax season or would like to work with a CPA in Nashville for filing your small business’s taxes, get in touch with us at Beyond Basics Accounting Resources, LLC today.