money Key tax changes this year could mean bigger tax refunds for many
Many taxpayers will face numerous tax changes on their federal returns this season after the government put in place various stimulus provisions to provide financial relief during the pandemic. That could mean a higher tax refund for many this year.
But for those who relied on unemployment insurance, they could have a smaller refund if taxes weren't withheld from their benefits payments.
"The thing that is really new this year is COVID," Kathy Pickering, H&R Block’s chief tax officer, told Yahoo Money. "It has brought so many uncertainties to nearly everyone's taxes."
The tax-filing season officially begins on Friday, February 12, with the Internal Revenue Service now accepting returns. Taxpayers have until April 15 to file their 2020 returns with the IRS.
Claiming your stimulus checks
Those who were eligible for a stimulus check but didn't get one or didn't get the full amount can claim this as a Recovery Rebate Credit on their federal tax return. The credit applies to both the first round of $1,200 stimulus checks sent in the spring and the second round of $600 checks sent in January.
Taxpayers who had significant life changes may also want to look into the credit. For instance, parents who welcomed a baby in 2019 or 2020 may be able to claim the additional money available for dependents.
College students and other young adults may be eligible for the payments if your parents don't claim you as a dependent on this year's tax returns, but did so in previous years.
Read more: Here's what to do if you haven't gotten your stimulus check
A change in income could also be a reason to claim the credit. For example, if you lost your job or experienced an income drop in 2020, you may be eligible for the payment or a bigger check than the one you got.
If you were eligible but never received your payment because you changed your address or the IRS didn't have banking information on file, you can also claim the credit.
If you’ve received a payment but want to claim a higher amount, you need to list the amount shown on your Notice 1444 and include it when completing tax documents Form 1040 or Form 1040-SR. You should’ve received Notice 1444-A for the first payment and Notice 1444-B for the second one in the mail.
If you're not eligible for a stimulus payment adjustment, you don't have to fill in that part of the return.
The 'look back rule'
Taxpayers will be allowed to use their 2019 or 2020 income to determine eligibility for the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). To qualify for the credits, you must have earned income in 2020; unemployment benefits don't qualify.
The CTC provides a credit of up to $2,000 per child under 17 and the amount is reduced for single filers making above $200,000 and joint filers earning more than $400,000. The EITC is a credit for low- and moderate-income working families. The maximum credit for families with one child is $3,584, while it is $5,920 for families with two children for the current tax year.
Choosing the year with higher income does not necessarily give you a higher credit, so calculate the credit under the different incomes and use the one that provides a higher credit. The credit may not just reduce your tax liability, it could also increase your refund.
"They're refundable credits," Lewis Taub, a certified public accountant and New York director of tax services at Berkowitz Pollack Brant Advisors, told Yahoo Money. "Not only they'll reduce your dollar-for-dollar taxes, but if your credit exceeds your tax liability, up to a certain amount, the IRS will refund you that amount."
Unemployment benefits surprise
With millions of Americans receiving unemployment benefits this year, many may be surprised to see they owe more taxes than they expected to the IRS because they didn't withhold at all or enough. Unemployment benefits are considered earned income and are taxed the same way.
“People receiving unemployment benefits are hard on cash and don't put aside the money for the unemployment income,” Taub said. “They do get hit unexpectedly hard when they actually have to pay their tax bill.”
Unemployment benefits are subject only to income taxes and not to payroll taxes like the income you get from your job. While you’d pay federal income tax on your unemployment benefits, you may not need to pay the state if you live in one of the nine states that don’t have income taxes, including Florida, Nevada, and Texas.
“It's still very very early in the season for us, but what we're finding is that even people with unemployment income are still getting a refund,” Pickering said. “It may not be as large as they'd gotten in the prior year but they're still getting a refund.”
People who got unemployment benefits in 2020 should have a Form 1099-G from their state. A lot of states don’t mail the form, so taxpayers should go to their state website to access the form.
Charitable donations
This year you may also get a bigger return if you donated to charity and use the standard deduction.
Taxpayers who take the standard deduction can deduct up to $300 in charitable donations this filing season. The $300 limit applies to both single filers and joint filers. Typically, only taxpayers who itemized their taxes could take a deduction for charitable donations.
"You either wrote a check or gave cash," Pickering said, noting that households goods donations cannot be deducted.
If you contributed money through your work, your pay stub as proof is enough to claim the credit. Otherwise, any receipts the charity gave you documenting your donation is enough.
Medical expenses
In previous years medical expenses had to exceed 10% of your adjusted gross income to be deductible. This tax season and going forward, that threshold is 7.5%.
"It's really helpful for people who are finding themselves. you know, in, in a difficult year with, you know, a lot of medical expenses," Pickering said.
Additionally, this season you can roll over any funds you have in a health care or dependent care flexible spending account (FSA). You will also be able to roll over any unused funds from 2021 to 2022. Usually, you have to spend those funds by the end of the calendar year or lose those pretax dollars permanently.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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