The Coronavirus and Your Taxes
Oh, so you thought you were done with the coronavirus now that it’s 2021? Unfortunately, the coronavirus (and the government’s response to it) has created a ripple effect that will be felt when you sit down to file your taxes for last year. Here are some things to keep in mind:
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s $2 trillion relief package, the government sent up to $1,200 in the form of a stimulus check to millions of Americans shortly after the pandemic shut most of the country down.
The good news is your stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. Translation: Your stimulus check is sort of like an advance on money you would have received anyway as part of your tax refund in 2021.
Paycheck Protection Program (PPP) Loans
The CARES Act also tried to help struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on certain business expenses—payroll, rent or interest on mortgage payments, and utilities, to name a few—these loans were designed to be “forgiven.”
In December 2020, the IRS announced that any eligible expenses you paid with money from those PPP loans can be deducted from your taxable income. So that’s a little bit of good news! But remember, you’ll have to get your loan forgiveness application approved by the Small Business Administration before you’re off the hook for the amount you borrowed.
Many Americans found themselves out of work (at least temporarily) after the pandemic shut down a large part of the economy and turned to unemployment insurance for help. Those who received unemployment benefits will need to pay income taxes on that money.
If you chose not to have taxes withheld from your benefits when you signed up, then you’ll either have to pay quarterly estimated taxes or set aside enough money from your unemployment benefits to pay your taxes come Tax Day.
Educational Expenses: 529 Plans and ESAs
Any money you take out of a 529 plan or Educational Savings Account (ESA) must be used for qualified educational expenses in order to be tax-free. Makes sense. But a lot of schools went remote or cancelled classes this year—which means your college might have refunded some or all of your 529 or ESA money. If that’s the case, you have 60 days to put the money back in the account or use it to cover other educational expenses. If you didn’t, you might have to pay income taxes and a withdrawal penalty.
There are also a couple of new ways you can use 529 plans in 2020 without having to pay any taxes. First, you can now use 529 plans to pay for the costs of certain apprenticeship programs—including fees, books and supplies. And second, you can also use money from a 529 plan to pay off up to $10,000 in student loan debt (that’s $10,000 total—not annually) without having to pay any penalties or taxes.