Common Income Tax Questions, Answers, and Your Checklist for 2020 Taxes

Common Income Tax Questions, Answers, and Your Checklist for 2020 Taxes

January 07, 2021
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Due to the coronavirus pandemic, along with the CARES Act assistance made available to Americans in 2020, you may have incurred certain tax implications that you haven’t considered. This may very well be the year you enlist the services of a tax professional to help you navigate the CARES Act rules and determine if any financial moves you made in 2020 carry a reporting and/or tax liability.

With that being said, below are the answers to some common questions, that include some CARES Act provisions, along with a checklist to help you prepare the information you need to file your 2020 income taxes.

Answers to the Most Common Income Tax Questions

Will I have to claim my COVID stimulus check on my taxes?

No, you will not. Stimulus checks are technically an advance on a temporary income tax credit. You don’t have to report it on your 2020 return as taxable income, even if you made additional income throughout the year.

Do I still have to pay a penalty if I didn’t carry health insurance?

There is no longer a federal penalty for not having health insurance. Keep in mind that each state has their own rules as far as state income tax goes. New Jersey, Washington D.C., and Massachusetts do penalize for not having insurance, and California also has a penalty requirement in place, depending on circumstances, but the federal penalty is no more.

Are unemployment benefits taxable?

Unemployment benefits are taxable, and they always have been. Even if you met the criteria under the CARES Act to receive an extra $600 a week (for up to four months) of additional in unemployment benefits—you must report this as taxable income. However, a person is able to request that taxes be withheld from the benefit checks. If you didn’t request that option, you must definitely pay income tax on received benefits.

Do I owe tax on a PPP loan?

Most Paycheck Protection Program (PPP) loans were structured as forgivable grants. When first introduced, the guidelines defined funds used for expenses as not tax deductible. However, recent regulations allow expenses used for PPP forgiveness to be tax deductible.

How do I know if my PPP loan qualifies for forgiveness?

Your PPP loan may qualify for forgiveness if you consistently maintained your staff and their salaries, and if you followed allocation guidelines of using 60 percent of the loan to do so. The remaining funds could be used for rent, mortgage and other debt interest, and utilities. Loan funds can also include payment for the following: software and cloud services, accounting and human resources, damage to property due to civil unrest, personal protective equipment and COVID-19-prevention equipment and costs for supplies that were ordered/contracted before you received the loan, as well as costs of perishable items that you ordered before or during the life of your PPP loan.

Contact your tax professional for assistance to determine if you meet this criteria.

How to Organize Your 2020 Income Tax Information

Make sure you have all important IRS income tax forms

You should have received these well before now, but the list includes:

 

  • W2 from your employer
  • 1099 forms from clients if you’re a subcontractor or freelancer
  • 1099INT forms that show interest you may have earned, (i.e., from savings accounts)
  • 1098 forms to show mortgage interest paid

 Capture all of the tax deductions you can take

This is crucial, as any deductions can impact your tax liability. If you are unsure of what you can deduct—seek appropriate counsel. This is particularly important if you are a business owner or run a home-based business. Tax laws have changed in the past few years, so you may be unaware of new deductions you can take or of any that may no longer apply to you.

Crunch your numbers

Take into account all areas that apply to you, including:

  • Income from all sources including investment income
  • Itemized deductions if you qualify
  • Business expenses
  • Home-based business deductions if you qualify
  • Health insurance and out-of-pocket health care costs
  • Charitable donations
  • College tuition payments if applicable
  • The same information listed here for any dependents you have

Double-check your math

This is essential, and especially if you’re a procrastinator. When you’re in a hurry—and under massive pressure like many of us are right now—your margin for making errors can increase. So, take your time and double-check that your addition, subtraction, and multiplication is correct.

Don’t forget to sign your income tax forms

Crazy, but it’s true. There are a number of people who, in a rush, forget to sign their income tax forms. Don’t let this be you. Additionally, take care to ensure the information you’re reviewing is accurate on your final tax forms. Typos are not uncommon and can cause unnecessary complications down the road.

Plan Ahead to Keep Your 2021 Income Tax Information Organized

Now that you’ve got 2020 taxes in order, start today to stay organized for 2021. If you must make quarterly tax payments, it is recommended you do so. It is much easier—and you won’t incur any penalty—if you make them every quarter.

Moving Forward

These coronavirus guidelines published by the U.S. Department of Treasury are helpful; please read them. Income taxes are complicated enough sometimes without the threat of coronavirus we are experiencing. So, if you’re unsure of how these new income tax rules affect you, please contact us. We are happy to work with your tax professional to determine the best plan for you.

Additional reading:

2020 Tax-Planning Strategies You Can Use Today

 

This article was written for information purposes only and should not be considered as tax, financial, or legal advice.