Whether you’re out of work, spending extra money, or just nervous about coronavirus, you may be wondering what kind of tax breaks you can take advantage of. Here’s what you need to know.
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Recovery rebates are the $1,200 stimulus checks for most adults.
Medical Expense Deduction
The biggest tax deduction you’d be looking for coronavirus is the medical expense deduction. This would cover things like the cost of your care and the premiums you pay for health insurance.
If your medical expenses exceed 7.5% of your Adjusted Gross Income (AGI) during 2020, you can claim the amount as an itemized deduction when you file your 2020 taxes. Typically, your medical expenses would have to be over 10% of your AGI before you could deduct them. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the lower, 7.5%, threshold through 2020.
Health Insurance Premiums
Your health insurance premiums maintain their usual tax status. If you’re self-employed or pay employee premiums as a business owner, you can deduct that as a business expense. Employees already get to exclude the employer-paid portion of their health insurance from their premiums. Employees don’t get a deduction for the portion they pay unless it falls under the medical expense deduction.
Health Savings Accounts
If you’re eligible for a health savings account, you can pay your qualified medical expenses related to coronavirus from your HSA. Remember that you get a tax deduction for contributions to your HSA and can withdraw it tax-free to pay for qualified medical expenses.
If you’re not already using your HSA and using it to pay medical expenses, you can open one, deposit the money, and immediately spend it on qualified expenses to receive a tax deduction for that year.
If you have other personal expenses, such as buying extra food for a quarantine, you probably won’t be able to deduct them. Only medical expenses are eligible for most of the above deductions.
If your business is spending extra money due to coronavirus, it should be deductible just like any other business expense.
Working from Home
Employees who work from home can no longer claim a home office deduction. If you’re self-employed, you can take a home office deduction under the usual rules.
There is no tax deduction for lost income. You just don’t pay taxes on that income and may fall under a lower tax bracket.
If you own a business and take a loss for the year, you may be able to use that loss to offset your profits on a prior or future year’s tax return.
If you lose your job to coronavirus and file for unemployment, any unemployment benefits you receive are generally taxable. The reason is that the benefits are a substitute for your taxable wages. If you receive benefits from a private unemployment fund you contributed to, you may be able to deduct the amount of your contributions from your taxable benefits.
Employers can defer a portion of 2020 payroll taxes. Half must be paid by December 31st, 2021, and the other half must be paid by December 31st, 2022. This includes the employer share of self-employment taxes.
If your investment portfolio drops because of the coronavirus market crash, you may be able to claim a capital loss or take advantage of tax loss harvesting.
Early Retirement Account Withdrawals
If you need to make an early retirement account withdrawal due to coronavirus, you may qualify for either normal tax/penalty exceptions or special rules for those impacted by coronavirus.
Suspension of Retirement Account Required Minimum Distributions
Congress has proposed (not yet passed) suspending RMDs for 2020. This prevents people from being forced to sell when the market is down. Otherwise, if you didn’t need the money and wanted to stay invested, you’d have to rebuy in a taxable account.
Extension of Time to Make IRA and HSA Contributions
You now have until July 15th to make 2019 IRA and HSA contributions. This gives you additional time to contribute a larger amount and maximize your 2019 deduction.
You can take an above-the-line deduction for up to $300 in charitable donations. The AGI limit on donations is temporarily increased to 100% of AGI.
Self-Employment Tax Delay
50% of your 2020 employer portion of self-employment taxes is not due until December 31, 2021. The other 50% will be due December 31, 2022.
Other Deductions and Credits
If coronavirus causes you to lose income, you may become eligible for income-based deductions and credits that you may not normally be eligible for. These may include the following:
- Traditional IRA deduction
- Roth IRA eligibility
- Premium Tax Credit (Obamacare subsidy)
- Earned Income Tax Credit
- Child Tax Credit
- American Opportunity Tax Credit
- Lifetime Learning Credit
- The April 15th, 2020 due date is now July 15th, 2020 for:
- Filing of 2019 tax returns.
- Payment of 2019 taxes (with no additional interest or penalties).
- Payment of 2020 estimated taxes (with no underpayment penalty).
- The June 15th, 2020 due date for estimated taxes is also now July 15th, 2020.
There is no waiver of interest and penalties for past-due taxes from prior years.