How Coronavirus Relief Programs Will Affect Your 2020 Taxes
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Here's your money briefing for Tuesday, January 5th. I'm J.R. Whalen for The Wall Street Journal. From stimulus payments to extra unemployment benefits to allowances for 401k withdrawals, Congress enacted all sorts of measures in 2020 to ease the financial hardship caused by the pandemic. Those changes are likely to affect how you prepare your tax return this year.
unemployment benefits are generally taxable. Now, of course, tax rates go down as your income goes down, so you might not have a lot of income to pay taxes on, but these unemployment payments are taxable.
Coming up, our tax reporter Laura Saunders will clear up some of the confusion about the tax implications of coronavirus relief benefits. That's after the break.
Federal coronavirus relief measures put some much-needed cash in people's pockets last year, and they're likely to affect your 2020 tax returns, and even in the years to come.
How will 2020 coronavirus relief measures affect your tax return overall?
Our tax reporter Laura Saunders has been going over the numbers, and she's here with details. Laura, thanks for being with us.
And thank you for having me.
So let's start with the stimulus payments that people got throughout 2020, including the checks that went out just before New Year's Eve. Is any of that money taxable?
No, it is not taxable. Period.
Okay, so people will not get any sort of a letter or a year-end statement from Uncle Sam?
No, people won't be getting a letter from Uncle Sam about this.
All right, but there's also a wrinkle in the rules here about stimulus payments and withdrawing money from an IRA. It could actually make somebody eligible for stimulus money even if they weren't last year.
During 2020, Congress suspended mandatory IRA distributions for retirees. You know, you usually have to take a certain amount every year if you're over a certain age, which is now 72. Now, those were suspended for last year, and a lot of people didn't take them, and that meant that their income, which was high in 2019, dropped significantly in 2020, and they will now find that they qualify for the stimulus payments when they file their taxes. So that's an interesting wrinkle to keep in mind.
Will people get any sort of an alert that they now qualify for stimulus money?
I don't think that people will get like a direct alert from the government, but I do think that checking to see if you qualify for the stimulus payments will be part of doing your 2020 taxes, whether you're doing them by yourself on paper or whether you give them to a tax preparer or whether you're using tax software package. I believe this has all been integrated into the systems.
All right, now let's move on to unemployment benefits, another piece of the coronavirus relief during 2020. How will people have to account for those?
The government's going to give you some help with this. Now, unemployment benefits are generally taxable. Now, of course, tax rates go down as your income goes down, so you might not have a lot of income to pay taxes on, but these unemployment payments are taxable. And the people who got them can expect to receive a Form 1099-G from the payer, that is the state government, telling the IRS what unemployment pay they got last year. So they should be on the alert for that.
So late in 2020, the government made changes to how people can deduct medical expenses. How will that affect people when they do their taxes?
The medical expense deduction threshold has bounced all around in the last few years or threatened to bounce around from 7.5% to 10%. What that is is you can't deduct medical expenses unless they're over that amount of your income. And Congress finally made a permanent provision that the threshold is 7.5%, which is better for people than 10%. Now, does this matter to a lot of filers? No, because they don't have unreimbursed medical expenses above 7.5% of their income. But it's a very important thing for people who have very high medical expenses, particularly, say, someone who's in a nursing home. because those are deductible costs. The definition of medical expenses is much, much broader for tax purposes than it is for insurance companies.
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