We have just passed the first anniversary of the COVID-19 pandemic and related economic downturn, and it feels like there might finally be a light at the end of the tunnel as many are getting vaccinated and restrictions are being lifted. Although this has been an incredibly tough year, there may be some ways to lessen lingering economic concerns by taking advantage of certain tax breaks for individuals available due to COVID-19.
Recovery Rebate Credit
By now, we are all familiar with the stimulus payments issued by the government. What is less widely understood is that these stimulus payments are refundable tax credits, and if your circumstances changed between 2019 and 2020, you may be entitled to claim the Recovery Rebate Credit.
The most recent (third) round of stimulus payments was based on the income reported on your 2019 tax return unless you had already filed for 2020. The stimulus payments begin to phase out if you’re above certain income thresholds that vary based on your filing status (single, married filing jointly, etc.). If you would have qualified based on your 2020 income, but did not receive a stimulus payment or received less than the full amount because your 2019 income was over those thresholds, you can claim the Recovery Rebate Credit and be refunded the difference.
There is another credit this year related to charitable giving. Prior to 2020, you could only take advantage of the deduction for charitable gifts if you itemized your deductions, and anyone taking the standard deduction received no incentive from the government for those charitable gifts. For tax year 2020, a change was made so that everyone gets a dollar-for-dollar credit up to $300 for their charitable gifts, whether they itemize their deductions or not. Credits help your tax liability more than deductions (deductions offset taxable income, but credits offset actual tax). If you don’t typically itemize, this is a change to pay attention to and take advantage of.
If you do itemize your deductions, consider asking your accountant about business expenses you had while working from home. Many of us had additional expenses this year while working remotely, and your accountant will be able to tell you if those qualify as deductible expenses.
Lastly, the IRS announced on March 17 that the filing and payment deadline for individual income taxes this year will be extended from April 15 to May 17, giving taxpayers an additional month to prepare their tax returns. If you are expecting a refund, you may wish to file sooner rather than later and get back that interest-free loan you’ve given the government.
If, however, you expect to pay in this year, consider filing just before the deadline to keep your money working for you, particularly if you will be paying those taxes out of an interest-bearing or money market account.
While we are still under the cloud of the pandemic, these tax changes might just provide a little bit of a silver lining.
Sidney Leasure is a business and tax attorney at Wright Lindsey Jennings where she utilizes her LL.M. in taxation to serve as counsel to individuals, partnerships, closely held businesses and charitable organizations in all manner of tax-related areas.