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Tax Year 2020

By: Tax Hotline
Winter 2021 (Vol. 38, No. 4)

As always, taxpayers should be aware of several key items involving credits, deductions, and refunds when filing their tax returns. Let’s take a look:

1. Recovery Rebate Credit/Economic Impact Payment. In January, the Treasury Department and the IRS began sending the second round of Economic Impact Payments (EIP2) to millions of Americans as part of the implementation of the Coronavirus Response and Relief Supplemental Appropriations Act. As with the first round of Economic Impact Payments (EIP1), taxpayers don’t need to take any action to receive these payments. Taxpayers who didn’t receive an advance payment should review the eligibility criteria when they file their 2020 taxes because many people, including recent college graduates, may be eligible for a credit. Taxpayers who received an Economic Impact Payment should have received Notice 1444, Your Economic Impact Payment, and should keep it with their 2020 tax records.

Individuals who received the full amount for both Economic Impact Payments do not need to complete information about the Recovery Rebate Credit on their 2020 Form 1040 or 1040-SR because they’ve already received the full amount of the Recovery Rebate Credit as advance payments.

Eligible individuals who did not receive an Economic Impact Payment – either the first or the second payment – can claim a Recovery Rebate Credit when filing their 2020 Form 1040 or 1040-SR this year. They may be eligible to claim the Recovery Rebate Credit on their tax year 2020 federal income tax return if:

  • They didn’t receive an Economic Impact Payment, or

  • their Economic Impact Payment was less than the full amount of the Economic Impact Payment for which they were eligible.

2. Option to Use Prior Year Income Amounts. Also new this year is the option to use prior year income amounts (2019) when computing the Earned Income Tax Credit and the Additional Child Tax Credit.

3. Interest on Refunds is Taxable. Taxpayers who received a federal tax refund in 2020 may have been paid interest. Refund interest payments are taxable and must be reported on federal income tax returns. In January 2021, the IRS will send Form 1099-INT, Interest Income to anyone who received interest totaling $10 or more.

4. Charitable Deductions. In 2020, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. Please note that this amount applies whether filing individual or joint returns. In 2021, this amount increases to $600 for joint filers ($300 for single filers).

5. Virtual Currency. If in 2020, you engaged in a transaction involving virtual currency, you will need to answer the question on page 1 of Form 1040 or 1040- SR. In 2019, this question was on Schedule 1.

6. Form 1099-NEC. Individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business in 2020.

DO YOU NEED TO FILE A 2020 TAX RETURN?

Most people file a tax return because they have to, but even if you don’t, there are times when you should - because you might be eligible for a tax refund and not know it. The tax tips below should help you determine whether you’re one of them.

Whether you need to file a tax return this year depends on several factors. In most cases, the amount of your income, your filing status, and your age determine whether you must file a tax return. For example, if you’re single and 24 years old, you must file if your income was at least $12,400. If you are age 65 or older, income thresholds are higher ($14,050 in 2020 for single filers). If you’re self-employed (see below) or a dependent of another person, other tax rules may apply.

Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year, and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund, but you must file a tax return to receive the refund. Here are some other factors to consider:

PREMIUM TAX CREDIT If you, your spouse, or a dependent was enrolled in healthcare coverage purchased from the Marketplace in 2020, you might be eligible for the Premium Tax Credit - but only if you chose to have advance payments of the premium tax credit sent directly to your insurer during the year. However, you must file a federal tax return and reconcile any advance payments with the allowable premium tax credit.

EARNED INCOME TAX CREDIT Did you work and earn less than $56,844 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,660. If you qualify, file a tax return to claim it.

You may elect to use your 2019 earned income to figure your EITC if your 2019 earned income is more than your 2020 earned income.

ADDITIONAL CHILD TAX CREDIT Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit and receive a refund even if you do not owe any tax.

AMERICAN OPPORTUNITY TAX CREDIT The AOTC (up to $2,500 per eligible student) is available for four years of post-secondary education. You or your dependent must have been a student enrolled at least half-time for at least one academic period. Even if you don’t owe any taxes, you still may qualify; however, you must complete Form 8863, Education Credits, and file a return to claim the credit.

HEALTH COVERAGE TAX CREDIT If you, your spouse, or a dependent received advance payments of the health coverage tax credit, you will need to file a 2020 tax return. Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments, shows the amount of the advance payments.

You must file a return in other situations as well, including, but not limited to the following situations:

  • You owe special taxes such as the alternative minimum tax (AMT), additional tax on qualified plans such as an individual retirement arrangement (IRA), or another tax-favored account, or household employment taxes. However, if you are filing a return only because you owe these taxes, you can file Schedule H, Household Employment Taxes.

  • You (or your spouse, if filing jointly) received Archer MSA, Medicare Advantage MSA, or health savings account distributions.

  • You had net earnings from self-employment of at least $400.

  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances

  • Child support payments

  • Welfare benefits

  • Damage awards for physical injury or sickness

  • Cash rebates from a dealer or manufacturer for an item you buy

  • Reimbursements for qualified adoption expenses

In addition, some types of income are not taxable except under certain conditions, including: Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable. Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable. If you received a state or local income tax refund, the amount might be taxable. You should have received a 2020 Form 1099-G from the agency that made the payment to you.