3 Things to Know About Income Taxes in 2020

The pandemic has impacted almost every area of our lives, and income taxes are certainly no exception. Due to the economic realities faced by many Americans at this time, Congress passed the CARES Act this spring and are now considering more legislation. Here’s what we know about income taxes so far in 2020.

Stimulus payments are an advance tax credit. Millions of taxpayers received stimulus payments of $1200 this spring, plus $500 for each child (up to a limit of three). Since these payments phased out at a certain income threshold, as determined by 2019 income, higher earners might have received a reduced check or no check at all.

But what happens if your income has dropped this year, due to the pandemic (or anything else, for that matter)? You could still receive the stimulus payment as part of your tax refund when you file next year, depending upon 2020 income.

And what about the rare individual who received a stimulus payment based on 2019 income, who actually earned more this year? No worries; the Senate Finance Committee has decided you won’t have to pay back any of that money.

Penalty-free early withdrawals from retirement accounts. Typically, those who take withdrawals from a retirement account before age 59 ½ face a 10 percent penalty fee. Thanks to pandemic relief legislation, that fee will be waived in many circumstances. You would still owe regular income taxes on the withdrawal, however.

You can also put the money back into your retirement account within three years, not subject to normal contribution limits.

Special allowances aside, this is a good time to remind you that taking early withdrawals from a retirement account should only be done as a last-resort measure. You might not owe a penalty, but you will still lose interest that money would have earned. Exhaust all other methods of funding a financial emergency before resorting to an early withdrawal from a retirement fund.

No required minimum distributions. Normally, by age 72 you must take required minimum distributions from your retirement account each year. And of course, income taxes are due on that money as well. That rule is waived this year, so if you don’t need to take your distribution you don’t have to. For some, this will equal an income tax savings.

As we persevere through this surprising and difficult year, stay in touch with us regarding any financial planning moves that you’re considering. We can help you estimate potential impacts and weigh consequences of each decision in advance.