Last updated on April 12, 2021. 

Please note: While most Americans have already received the third and latest round of direct COVID-19 financial relief through Economic Impact Payments (EIPs), some have not yet received and will not receive unless they file a 2020 tax return or tax extension by May 17, 2021. If you have questions about receiving an EIP, please visit this resource from the Consumer Financial Protection Bureau.

Many are excited to leave 2020 behind. However, there is one major 2020-related task left to complete: your 2020 individual tax return. In March of 2020, Congress passed the CARES Act to provide relief to those impacted by the COVID-19 pandemic. If you received a stimulus payment or unemployment payment or were impacted by the CARES Act in another way, you may be wondering how it affects your tax filing. Here’s an overview of a few things to keep in mind as you prepare your 2020 taxes.

Economic Impact Payments and Recovery Rebate Credit

Economic impact payments – also referred to as “stimulus checks” – are not taxable for federal purposes, but they do reduce your recovery rebate credit.

Taxpayers are required to reconcile any economic impact payments they received against the recovery rebate credit calculated using their 2020 filing status, adjusted gross income, and qualified dependents.  If you have experienced a lower adjusted gross income or have added additional dependents, you may receive a credit on your 2020 tax return, resulting in a larger benefit.

Taxpayers are eligible to claim the recovery rebate credit if, in 2020, they were a U.S. citizen or U.S. resident alien, weren’t a dependent of another taxpayer and have a valid social security number. This includes individuals who died in 2020. If you qualify but didn’t receive the recovery rebate credit in the form of economic impact payments, you will receive the difference as a refundable credit toward your 2020 taxes.

Unemployment Compensation and Additional $600 Weekly Benefit

In addition to economic impact payments, the CARES Act included provisions that allowed individuals eligible for regular unemployment compensation to receive an additional $600 weekly unemployment compensation benefit.

Unemployment compensation is taxable income. States issue form 1099-G to report unemployment compensation and any federal or state withholding amounts to recipient taxpayers, and taxpayers then report this amount in their form 1040.

It’s important to note that while individuals can elect to withhold taxes from unemployment compensation, they are not required to do so. This means many affected taxpayers may be surprised to learn that the unemployment compensation they received is taxable. They may be further surprised to learn any voluntary withholding from their regular unemployment compensation was not also deducted from the additional $600 weekly benefit. If you received these benefits, keep in mind they may have a large impact on your net tax due or expected refund.

Note: On March 11, 2021, President Biden signed the American Rescue Plan of 2021 legislation including a retroactive provision excluding the first $10,200 of unemployment benefits received in 2020 from federal taxable income. Congress and the IRS are well aware of the many affected taxpayers that have already filed their 2020 returns, which included these amounts as taxable income. The IRS posted a statement strongly requesting those who have already filed not to amend their return until the IRS issues guidance specific to these amendments. Any affected taxpayers who have not filed, should complete the IRS worksheet used to determine taxability of unemployment benefits.  

Above the Line Charitable Deduction

The CARES Act also includes a special new provision that allows taxpayers to easily deduct donations made to charities in 2020 in the form of an “above-the-line” charitable deduction. The deduction is limited to $300 for single and married filing joint taxpayers, and $150 for married taxpayers filing separately.

To qualify, the taxpayer should choose a standard deduction rather than an itemized deduction. Contributions must also be made to organizations that are charitable, religious, educational, scientific, or literary in purpose. Keep in mind that an above-the-line deduction may not be taken for a donor advised fund contribution.

Next steps:

  1. For a refresher on the provisions included within the CARES Act, read my previous article.
  2. Contact me if you have any questions.
  3. Subscribe to our e-newsletter.

Bankers Trust Company and its affiliates and their representatives do not provide tax or legal advice. You should consult with your tax and legal advisors regarding your unique situation and needs.