COVID-19 stimulus payments not taxable

Apr. 25—The pandemic affected nearly all aspects of life in 2020, so it should come as no surprise that there are implications that extend to your tax filings as well.

The most obvious is the tax deadline. The IRS has extended the filing deadline that applies to 2020 returns for individual taxpayers and some businesses to May 17

Let's start with those stimulus payments, said Barbara Weiss, owner of AccuTax Xpress of Williamsport (formerly of Lewisburg).

COVID-19 stimulus payments are not taxable. Receiving these payments won't affect how much you owe in taxes and they won't reduce the amount you receive as a refund

"You do not have to return stimulus money," she said.

As long as your 2019 or 2018 income qualified you, she said, you may keep the money, "and spend it on what you need and want."

In addition, if you received $500 for a child who turned 17 in 2020, you do not have to return that payment either.

You can file for stimulus money you are eligible for but have not received. By claiming the Recovery Rebate Credit on your 2020 tax return, your stimulus payment will be applied to your taxes as a credit, reducing the amount you owe or increasing your refund payment, depending on your situation.

Keep the notice you received with your payment(s) on file. The IRS mailed out Notice 1444, Your Economic Impact Payment within 15 days of sending out stimulus payments. You should keep this notice with your 2020 tax records so you know how much you received in stimulus money and when you received it.

Unemployment benefitsFor taxpayers who were impacted by COVID last year that might have received unemployment benefits, Bucknell Freeman College of Management Professor James Lawson, accounting said "in a normal year people have to pay taxes on unemployment benefits."

Unemployment is usually included as taxable income, but the recent bill passed by Congress in March allows up to $10,200 in unemployment benefits to be excluded from taxable income as long as the taxpayer has total income of less than $150,000.

Other COVID changesAnother big change that was passed by the CARES Act in 2020, Lawson said, "is that normally taxpayers have the option of choosing between the standard deduction or itemized deduction. such as charitable contributions or paying interest on your home.

Eighty percent of Americans take standard deductions.

Under CARES, taxpayers, even if you take the standard deduction you can still have an extra $300 deduction for a charitable contribution you made in the last year."

Congress wanted to incentivize giving, Lawson explained. "So you can take the standard deduction plus up to $300 for that charitable gift you gave in the past year. That's pretty unique."

Normally, if you have a retirement account and have been funding your retirement, if you withdraw that money before you have reached the retirement age you would be subject to a 10 percent penalty, he said. "But if you had corona virus hardship and that is why you needed to withdraw the money you can avoid the 10 percent penalty. Congress has decided to waive the penalty if you needed it due to COVID hardship. [You would have to pay the regular tax on that income, but not the 10 percent penalty]."

Be cautious, however, about thinking that just because you worked at home in the last year they might qualify for the home office deduction, Lawson said. "In general, if you are an employee and received a W-2 at the end of the year from your employer, you won't qualify for a home office deduction."

Although Lawson's advice was targeted to individual taxpayers, he did say that if you are a small or medium sized employer — a business with generally less than 500 employees — and if you paid for one of your employees to have sick time due to COVID, you qualify for a credit that would pay you back the amount you payout to your employees for their COVID sick leave.

"Similarly," he said, "if you are self employed and you had to take time off because you had COVID or had to care for a family member that had COVID you also could qualify for this sick leave tax credit."

Non-COVID adviceLawson wanted to touch on a non-COVID related tip.

One big tax credit is called the Earned Income Tax Credit, he said. "That is for taxpayers with low to moderate income. But every year, approximately 20 percent of people who qualify don't claim the tax credit. People are leaving money on the table. For families with up to three children the Earned Income Tax Credit can be up to $6,650. That's the maximum. So if you are in that income category, looking into that credit. It's very beneficial."

People who haven't filed their taxes yet, there are free resources available. If you want to file online there is The Free File Alliance. If your income is less than $66,000 you can file your taxes online for free using their software.

If you don't want to file online there is the Volunteer Income Tax Assistance Program. In Union County has volunteers that serve as VITA employees. They will help you file your tax for free. "This is a great resource," Lawson said. "Particularly for lower income taxpayers."

DisclaimerWhile offering his expertise as "general advice," for this article, Lawson made it clear that if people have specific questions they should contact a tax professional for personal advice, "and certainly do more research, depending on your situation and income level."