‘Do I Owe Taxes on My Stimulus Checks?’ Answers to Common 2020 Income Tax Questions
Last updated February 22, 2021
Every tax filing season is different. While there are no significant tax law changes to worry about this time around, there are some issues related to the pandemic that could trip you up—or save you money.
Checkbook consulted with several tax professionals to answer some of the most common questions for filing 2020 returns.
Q: Do I owe taxes on my federal stimulus payments?
A: No. The stimulus payments, formally known as “Economic Impact Payments,” were technically an advance tax credit,” said Matthew Frankel a CFP who writes for The Motley Fool. “It's just like any other tax credit, except in this case, the government was giving out the money ahead of time, rather than at tax time. So under no circumstances is that money taxable income.”
More good news: Stimulus payments won’t reduce any refund you might have coming, and they won’t affect your reportable income when it comes to qualifying for federal government assistance or benefit programs.
The IRS announced last week that all first and second round Economic Impact Payments have been issued to those eligible to receive them, although a few checks and debit cards may still be in the mail.
If you qualified for Economic Impact Payments, but didn’t get your money, or received less than should have gotten, claim it as a credit—the Recovery Rebate Credit—on your tax return. You must file a 2020 return to claim the Recovery Rebate Credit, the IRS says, even if you are not required to file a tax return for 2020 based on your income.
The amounts of your two stimulus checks were based on the taxable income reported on your 2018 or 2019 return, the only information the IRS had at the time. So, if your financial situation changed in 2020—maybe your income dropped dramatically, you had a child, got married, or divorced—you may be entitled to more money, and you get that by claiming a Recover Rebate Credit.
Frankel gave Checkbook this example: “Let’s say you and your spouse made $400,000 in 2019. In that case, you would not have qualified for any stimulus money. But if you lost your jobs and earned less than $150,000 in 2020, you did qualify for the full amount of both stimulus payments. So, in this scenario, you’re owed a rebate of $3,600 or more, but you have to claim it on your return.”
Note: If Congress approves President Biden’s plan for a third stimulus payment, it will be based on your 2020 income, as reported to the IRS. So, if you have all your paperwork in order and are ready to file, don’t delay.
Q: What about the unemployment compensation I received while I was out of work?
A: That’s another story. To the IRS, jobless benefits are considered ordinary income, no different than if you got that money in your paycheck.
“Unemployment benefits are taxable; the IRS has been very clear about that. In some cases, there can also be taxes at the state level, if you have a state income tax,” said Jack Wan, a certified public accountant in Maryland.
Unemployment benefits are not subject to state income tax if you live in California, Montana, New Jersey, Pennsylvania, Virginia, and Wisconsin.
If you didn’t have taxes deducted from your benefit checks, you could be in for quite a surprise.
Note: Tax liability rules are constantly changing as some states try to provide economic relief to their citizens. For example, last week, Maryland Governor Larry Hogan signed the RELIEF Act of 2021 into law, eliminating state and local income taxes for residents on their unemployment benefits on their 2020 return. It’s possible something similar could happen in other states with an income tax.
Q: I worked from home for most of last year and spent a fair amount of money on office supplies, like paper and printer ink. I even bought a new headset. I paid for all this and did not get reimbursed from my company. Are these home-office expenses deductible?
A: No. The Tax Cuts and Jobs Act of 2017 eliminated home office deductions for regular employees (those who receive a W-2 form in January). So, if you’re working for your company from home because of the pandemic, your only option is to ask to have those home office expenses reimbursed.
If you are self-employed (get 1099 income statements) and your house is your “principal place of business”—and you have a dedicated office that is not used for other purposes—you can deduct certain office expenses. Having a desk in the corner of the garage does not count.
For example, you can deduct all the paper and toner you buy for your home office printer, since it must be used exclusively for business. But you can only deduct a portion of what you pay for phone or Internet access, if those services also are used for non-business purpose by you or other family members.
“The IRS lays out the calculations on its website, so I would definitely recommend looking at all those details,” said Kimberly Palmer, a personal finance expert at NerdWallet. “Basically, you can deduct a portion of your mortgage or rent, a portion of your utilities, and other costs associated with your home office, but only if you're self-employed.”
More Info: IRS: The Home Office Deduction
Q: I really need that refund. How can I get my money as quickly as possible?
The quickest way to get your refund is file electronically and have it direct deposited into your financial account. Do that and in most cases your refund should be issued in less than 21 days, the IRS says.
Direct deposit is free, simple, and secure. You can even split your refund to have it deposited into as many as three financial accounts, including a bank or Individual Retirement Account. Part of the refund can even be used to purchase up to $5,000 in U.S. Series I Savings Bonds.
With direct deposit there’s no check to get lost, stolen, or returned to the IRS as undeliverable. It also saves taxpayer money. It costs more than $1 for every paper refund issued, but only a dime for each direct deposit, the IRS estimates.
“Because the IRS is so far behind in terms of processing anything by paper, filing electronically this year is really the key,” Wan said. “If you're dealing with any sort of complicated tax issues, expect a very long turnaround time.”
The Where's My Refund? tool is updated daily, usually overnight, so there's no reason to check more than once per day or call the IRS to get information about a refund. You can check the page within 24 hours after the IRS has received your e-filed return or four weeks after mailing a paper return.
More Info: IRS Bulletin on Direct Deposit
Q: Were the rules changed this year for charitable deductions?
A: Yes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted last spring, allows taxpayers who do not itemize to deduct up to $300 in cash donations made to qualifying charities last year. This “above-the-line” deduction lowers both your adjusted gross income and taxable income, which will result in a tax savings.
Cash donations include those made by check, credit card, or debit card. They do not include household items or property, or securities. By law, you must have proof of a charitable deduction, such as a receipt or acknowledgement letter from the charity, a canceled check, or credit card receipt.
Q: The tax filing season started two weeks late. Is the tax filing deadline still April 15?
A: Yes, so far the IRS says it does not plan to extend the deadline, as it did last year.
Q: Is it true that I can prepare my return and file it electronically for free?
A: Yes, if you qualify.
Anyone with an adjusted gross income (AGI) of $72,000 or less in 2020 can do their taxes for free through the IRS Free File Program, a partnership between the IRS and nine major tax software companies. You get free online preparation and filing of your federal return. There may be a fee for state returns.
The IRS Free File online look-up tool can help you quickly sort through the nine Free File offers to find the ones that best meet your needs.
Tip: It’s best to use the Free File portal on the IRS website to compare Free File options. This is much safer than searching online for something like “file my taxes for free.”
Q: I need some personal assistance, but can’t afford to pay a professional? Is free help available?
A: Yes. Free tax preparation assistance is also available through these three programs:
- The AARP Foundation Tax-Aide program provides in-person and remote tax assistance, with a special focus on taxpayers who are 50 or older, or who have low to moderate income. Tax-Aide volunteers are trained and IRS-certified every year to make sure they know about and understand the latest changes and additions to the tax code.
- The IRS Volunteer Income Tax Assistance (VITA) program offers free tax help to those who generally make $57,000 or less, people with disabilities, and taxpayers who speak limited English.
- The IRS TCE program offers free tax help for those who are 60 years and older, specializing in questions about pensions and retirement-related issues unique to seniors.
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.