Millions of American taxpayers received federal benefits intended to provide relief from the economic impact of COVID-19 shutdowns, in the form of stimulus payments and unemployment compensation, during 2020. As we begin the new year and look to the approaching tax season, it is important to recognize the tax implications of those benefits. While we strongly recommend consulting your tax professional regarding personal considerations, here are some highlights you should know in advance of completing your 2020 tax return:
- Unemployment benefits are taxable income on the federal level, though not all states tax them. While individuals may request withholdings be taken out at the time benefits are issued, few do. Unemployment benefits should be included as income on your 2020 return. Failure to do so can result in penalties and interest down the line.
- Stimulus checks, which were distributed in connection with the federal Coronavirus Aid, Relief and Economic Security (CARES) Act, are not taxable income. If you did not receive yours or did not receive the full amount, you can still receive the stimulus benefit through your 2020 federal tax return. The benefit was set up under the Act as a credit to your 2020 tax return, with the monetary payment being made in advance. If you did not get your “advance” payment, you can offset the amount you should have received against taxes owed or increase any refund due to you.
- State regulations vary widely on whether working from home due to the pandemic constitutes a sufficient nexus to create a withholding obligation for state taxes. If you live in a different jurisdiction from your assigned office location and have been working from home, you will need to determine whether you have a new income tax obligation as a result. On the plus side, you may also have additional deductions available to you as a result of working from home as well, such as internet service, cellphone service, and travel expense.
The 2020 tax cycle, like the rest of 2020, is sure to involve new twists and turns. An early start to navigating the regulations is suggested. If you have questions or need a recommendation for a tax professional, we are happy to help.