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4 Financial Tax Breaks To Help During Covid-19
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4 Financial Tax Breaks To Help During Covid-19

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Many Americans find themselves in big financial trouble as a result of the Covid-19 pandemic. If you’re among them, anxiously awaiting another stimulus check or expanded unemployment benefits, you may be able to squeeze some extra assistance from your taxes.

The CARES Act, signed into law in March 2020, offers a number of helpful tax breaks. In addition, some lesser-known tax breaks that could help you defer or eliminate hundreds or even thousands of dollars in tax payments. Here’s what you need to know.

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1. Retirement Early Withdrawals Get Special Treatment in 2020

Most financial experts advise that tapping into retirement funds early is a bad idea. But for many Americans who are suffering financially during Covid-19, taking money out of a retirement account may be a necessary last resort. 

Normally, the Internal Revenue Service (IRS) charges a 10% penalty if you make an early withdrawal from a qualified retirement account, such as a 401(k) or individual retirement account (IRA), before you turn age 59 ½. The CARES Act waives this penalty for coronavirus-related distributions in 2020.  

To qualify, you, a spouse or a dependent must have been diagnosed with Covid-19or have experienced adverse financial consequences from reduced work hours, being laid off, inability to work due to lack of child care, or other factors detailed by the IRS.  To prove you qualify for a coronavirus distribution, you can self-certify with your retirement plan administrator.

The CARES Act also provides flexibility on when you must pay taxes on the funds you take out. Typically, an early distribution would be taxed in the year of withdrawal. The CARES Act lets you choose to spread the tax payments over three years or to pay them all in the first year.    

If you withdrew a $30,000 coronavirus-related distribution from a qualified plan in 2020, for example,  you could opt to pay taxes on $10,000 a year in the tax years 2020, 2021, and 2022. Alternatively, you could choose to have the entire distribution taxed in 2020.  

“In essence, the taxpayer may be able to defer the taxable income of the distribution to subsequent years. This may help reduce the tax burden for the current year while shifting it to the following years,” said Carl Johnson, an independent Certified Public Accountant (CPA) in New Orleans. 

The CARES Act also lets you avoid paying taxes on the money if you repay the borrowed funds within a certain period of time. 

Let’s say you decide to withdraw $30,000 from a qualified retirement plan in 2020, and opt to pay taxes over three years. If you repay the full amount in 2022, the IRS will refund the taxes you’ve already covered and waive the remaining taxes. Note that you need to amend your previous tax returns to claim the refund. 

2. Get a Tax Deduction If Friends or Family Owe You Money 

Have you loaned money to friends or family, and don’t expect the loan to be repaid? If so, you may be able to deduct the bad loan amount from your taxes. This isn’t a new tax break, but it’s a great way to reduce your taxes if you qualify.

The IRS allows you to take a tax deduction for loans made to friends or loved ones that you don’t expect to be repaid, officially referred to as a non-business bad debt. The debt has to be considered worthless at the time of the deduction, and the IRS lets you claim the deduction up to seven years from the date the loan becomes worthless.

There are a few other rules to keep in mind. First, the debt must be valid for the purpose of the deduction. If you made a gift to a friend and later decided to treat it as a loan, for example, it would not be considered valid by the IRS for tax purposes.

Next, the IRS only considers a debt to be worthless if the person who owes the debt is suffering unemployment, foreclosure or other financial hardships.  Say you lent money to a friend, who then lost their home to a foreclosure caused in some way by Covid-19 and was unable to repay the debt. This would be considered a valid loan for a tax deduction.  

Additionally, the taxpayer must have already included this income on prior tax returns. You cannot deduct funds you expect to receive in the future, like rent, wages or other types of income. 

Finally, the IRS requires taxpayers to demonstrate they have taken the necessary steps to collect the debt, by recording efforts such as phone calls, certified letters and other forms of communication.  

3. Freelancers Who Work from Home Can Claim Tax Deductions

Self-employed workers can claim a tax deduction for their home office (the home office deduction for regular employees was eliminated by 2017’s Tax Cuts and Jobs Act). You may claim the deduction if you use part of your home, like a spare room, exclusively for conducting business. It’s also available if you do business at a location outside your home and maintain an additional home office.

There are two ways of calculating the tax deduction, each of which can yield different amounts. You should choose the method that yields the highest deduction.

With the regular method, the tax deduction is equal to a percentage of your total allowable expenses, such as mortgage interest, property taxes, insurance, utilities and other costs. To get the percentage, divide your home office square footage by your home’s overall square footage. If your home office was 200 square feet and your home was 1,000 square feet, you would deduct 20% of your allowable expenses (200 / 1,100 = 0.2). 

 

With the simplified method, you multiply a special rate—$5 for 2020—by your home office’s square footage to determine the total tax deduction. If your home office was 200 square feet, you’d simply multiply 200 by $5, yielding a tax deduction of $1,000.  

4. Not itemizing? You can still take a charitable deduction

Before the passage of the CARES Act, charitable contributions only qualified as a deduction if you elected to itemize, which allows you to deduct certain qualified expenditures on your tax return. 

It’s worth itemizing deductions if your total qualified expenditures exceed the standard deduction, which is $12,400 for single taxpayers and $24,800 for married couples in 2020. 

However, beginning in 2020, the CARES Act allows taxpayers to take a deduction for charitable contributions of up to $300 whether they elect to itemize or not. 

This $300 limit applies to the tax return no matter your filing status. For instance, if a married couple decides to give $600 to a charitable organization, the amount is limited to $300—the same as it would be for someone filing alone.

Keep in mind that the $300 charitable contribution special deduction applies only to cash, check, and electronic payroll deductions contributions. If you donated clothes to your local Goodwill, the donation wouldn’t qualify. 

To make sure you benefit from this new deduction, it’s essential to keep good records and check the tax-exempt organization’s status, says Pam Balentine, certified public accountant and owner of Viking CPA Group in Atlanta. 

“Most organizations are open and willing to disclose if they are a tax-exempt organization, which is the criteria for the contribution to be deductible. However, taxpayers can check the IRS website to confirm the organization’s status,” said Balentine. 

Balentine also advises donors to keep a record of their contribution receipt for at least three years. 

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