5 questions to prepare for 2020 tax season
The 2020 tax season is set to be one of the most difficult yet due to the changes implemented in the CARES Act, unemployment and more. It’s more important than ever to take the time to understand how these changes impact your taxes and revamp your tax strategy. Here are a few questions to ask your CPA so you can work together to reduce your taxes as you prepare for the 2020 tax season.
Are there any new deductions offered through the CARES Act?
Typically, charitable contributions could only be deducted if you itemized your deductions. This year, the CARES Act allows those who take the standard deduction to write off $300 in charitable donations to a qualifying organization. You can check that a charity qualifies as a charitable organization for income tax purposes with the IRS Tax Exempt Organization Search. The CARES Act also allows taxpayers that itemize to deduct cash donations up to 100% of their adjusted gross income.
Do I owe taxes for the economic impact payment I received?
The economic impact payment does not count as taxable income. Rather, it is treated as a refundable tax credit. This means that the payment will have no effect on your refund or what you owe on your 2020 tax return. In addition, the payment will not affect income for purposes of determining eligibility for federal government assistance or benefit programs. This also applies to the next round of $600 relief checks being distributed by early 2021.
I received unemployment benefits for a period of time. Do I owe taxes?
When you receive unemployment, you have the choice to have taxes withheld from each payment or pay a lump sum of taxes on your return. If you chose not to have taxes withheld from your benefits, you will need to pay quarterly estimated taxes or plan to pay the taxes owed when you file. If you receive unemployment in the future, consider having your taxes withheld to avoid a larger tax bill when it’s time to file.
What should I do if I took money out of my 401(k)?
The CARES Act allowed people to withdraw up to $100,000 from 401(k)s and the 10% penalty was waived for 2020. If you decided to withdraw from your account, the money you withdrew will be taxed as ordinary income, so you will need to plan accordingly. However, you have three years to put those funds back and get a refund on any taxes you paid on that money. Alternatively, you can report 1/3 of the income in 2020, 1/3 in 2021 and 1/3 in 2022.
How will the relief bills passed affect my tax season as a business owner?
In the CARES Act, lawmakers specified that forgiven PPP loans would not count as taxable income. Through the newly passed $900 billion coronavirus relief bill, businesses can deduct expenses paid with forgiven PPP loans. This clarification applies to old loans and to new loans and does not include any additional limitations. The bill also includes continued Small Business Administration (SBA) debt relief payments, $2 billion for enhancements to SBA lending and expansion of the deduction for business meals to 100 percent for 2021 and 2022.
Working through the tax challenges of 2020 will take time. While many prefer to wait until the last minute to address our taxes, it’s important to start the conversation with your CPA now while you have time to adjust your tax strategy.
Tom Wheelwright is a CPA, CEO of WealthAbility®, Best-Selling Author of “Tax-Free Wealth” (Rich Dad Advisors Series), Speaker, Entrepreneur and Host of 2 popular podcasts: The WealthAbility® Show with Tom Wheelwright CPA and The WealthAbility® for CPAs Show.