How Has COVID-19 Affected Your Taxes for 2020?
The 2020 tax document gathering season is here, and this year holds even greater challenges than usual for taxpayers. According to TSCL’s annual Senior Surveys, about 50% of retired households pay taxes on a portion of Social Security benefits, and recent tax legislation that became effective in 2018 has had little effect on reducing that number. But that may change this year, especially for older workers who lost earnings due to business shutdowns. What will change for 2020? As you start gathering what you need to file your taxes, here’s a checklist of four special considerations complicating the 2020 tax year:
- Wages and working from home income. — Were you working at the start of the COVID-19 pandemic? If you were, have you received a W2, or a 1099 for wages and earnings from your employers? It’s important to understand the difference between these forms because it’s a big one. If you receive a 1099, and your employer did not withhold payroll or federal income taxes, then you are considered an independent contractor, and responsible for reporting and paying your own self employment taxes, including the full 12.4% in Social Security taxes and 2.9% Medicare payroll taxes, as well as federal and state withholding taxes. If this is the first time you’ve been self-employed, the amount of tax liability can come as a shock, because you pay the full amount of the payroll tax, both your portion and the employer’s matching portion of Social Security and Medicare taxes. If this is your situation, you may want to get the advice from a tax professional quickly, because you need to report and pay payroll taxes by specific deadlines in order to avoid late filing penalties. Hang on to your W2 and 1099s because you will need them as evidence of earnings to file your income taxes. If you lost a job, and receive unemployment compensation, that must be included as income.
- Retirement account distributions. — Coronavirus stimulus legislation (CARES Act) that was signed into law last March waived required minimum distributions (RMDs) in 2020 for anyone who owns a 401(k), 403(b), or IRA. In addition, major changes to RMD rules were already underway prior to the CARES Act. The SECURE Act, which was passed in 2019, extended the age requirement for starting RMDs. If you reached age 70½ in 2020 or thereafter, you may wait until April 1 of the year after you reach age 72 to take your first RMD.
- Did you receive your Social Security 1099? If you receive Social Security benefits, the Social Security Administration sends out Form SSA-1099 in January. This form shows the total amount of benefits received from Social Security (prior to deductions) which is how much Social Security income to report to the IRS on your tax return. If you have not received it by mid- February, don’t call or even try to visit a Social Security office, many of which have been closed during the pandemic. You can quickly and safely get a copy of your form by setting up an account at my Social Security (SocialSecurity.gov).
- Will you need to itemize medical and other expenses, or is more advantageous to take a standard deduction? Ironically, COVID-19 has meant lower spending on healthcare costs in 2020 for many people. From the start of stay at home orders in mid-March, hospitals, outpatient clinics, doctors, dentists, eye doctors, and a host of other health care providers suspended non-COVID and elective medical care. On the other hand, that means that if you did seek medical care, chances are you had something really serious that could not wait — such as heart problems, stroke, or cancer. And you may have accumulated an equally serious pile of expenses. To figure out if itemizing would be better for your tax situation, you need to do the math.
The standard deduction for married filing jointly is $24,800 in 2020 and for single taxpayers or married individuals filing separately, the standard deduction is $12,400. If you do not itemize your deductions, you and/or your spouse may receive an additional deduction for being 65 years and older. You can qualify for an even higher standard deduction if either you or your spouse is blind.
However, if your income was lower than in previous years, and you have high medical expenses, you might be able to deduct more by itemizing. You may deduct the amount of total medical expenses that exceed 7.5% of your adjusted gross income. For example, if your adjusted gross income in 2020 is $26,000, then you could deduct medical expenses exceeding $1,950, ($26,000 X .075 = $1,950). Medical expenses include premiums, out-of-pocket costs, payments for uncovered services, transportation to medical services, and durable medical equipment.
To learn more about which medical expenses you can deduct, see IRS. Publication 502, Medical and Dental Expenses, at www.IRS.gov.