Preparing ahead of time for the upcoming tax season is crucial, especially in 2020. As a result of the COVID-19 pandemic, many people have experienced changes to their finances that may have significant impacts on how much they will owe the IRS. Here are some common areas that may affect how much you owe:
Change in Income
One of the most common changes people have experienced is a significant increase or decrease in income. If you have a significant change in income from previous years or a different form of income altogether, this may cause changes from a tax perspective.
A large enough change to your income may place you in a new tax bracket. If you qualify for a higher tax bracket, you should be wary of additional costs for filing your return that may not have been an issue before. You should still check your withholding levels on your W-4 to check that sufficient funds are set aside to cover any added expenses. Withholding too little could result in owing money to the IRS.
An unprecedented number of citizens filed for unemployment this year than any other in recent history. A common misconception amongst those that receive subsidized income is that it is not taxable. If you currently receive or have received benefits, you may need to take steps to ensure that the unemployment compensation is accounted for by the IRS.
“Unemployment benefits are considered taxable income, even the $600 boost that was in effect until the end of July. While you don't have to pay Social Security or Medicare taxes — typically about a combined 7.65% rate — while receiving unemployment benefits, you do have to pay federal income taxes and state taxes in some jurisdictions,” says Megan Leonhardt from CNBC.
Withdrawal of Funds from Retirement Accounts
As many people struggle to make ends meet, additional government measures have been taken to help citizens stay afloat. Earlier this year, lawmakers instituted rules under the CARES Act allowing Citizens to withdraw up to $100,000 from their retirement savings without the typical 10% penalty.
This policy is only available in 2020 and allows participants to repay the withdrawal balance over three years while avoiding income taxes. However, you will owe income taxes on those withdrawals if you do not refund the account within the three years.
An additional component of the CARES allows federal student loan recipients to suspend their payments temporarily. This act also reduced the interest rate of student loans to zero percent for the remainder of 2020.
It is important to check whether you qualify as a candidate to write off student debt from your taxes. If you earn less than $70,000 as an individual and $140,000 filing jointly, a deduction of up to $2,500 in student loan interest may be applicable.
To ensure that you are getting the most out of your filing, we recommend connecting with a tax professional. Tax professionals are key in utilizing the current tax regulations and benefits enacted during the pandemic. You can get connected with a professional for a consultation today at Taxfyle.com