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    Pandemic relief measures and your tax return

    Discover Muscatine Staff
    The Staff at Discover Muscatine features talented designers, writers, proofreaders, editors, and other specialists dedicated to bringing Muscatine County the very best local news available.

    Muscatine Living

    Recovery Rebate Credit

    Most U.S. households received two Economic Impact Payments (EIPs) from the federal government in 2020. They are not taxable because technically they are advances on a refundable credit against 2020 income taxes.

    In order for the money to be delivered quickly, eligibility was based on 2019 income tax returns (or 2018 if a 2019 return had not been filed). Eligible taxpayers who did not receive two full payments, possibly due to errors or processing delays, may claim the money as a Recovery Rebate Credit on their 2020 tax return. Households that reported a lower AGI in 2020 (or added a dependent) might be eligible for additional funds. To calculate the credit, filers will need to know the amounts of any payments they already received.

    Taxpayers who received two full payments don’t need to fill out any additional information on their tax returns.

    Coronavirus-Related Distributions

    Another measure in the CARES Act allowed IRA owners and employer-plan participants who were adversely affected by COVID-19 to withdraw up to $100,000 of their vested account balance in 2020 without having to pay the 10% tax penalty (25% for SIMPLE IRAs) that normally applies prior to age 59½.

    To help manage the tax liability, qualified individuals can choose to spread the income from a coronavirus-related distribution (CRD) equally over three years or report it in full for the 2020 tax year, with up to three years to reinvest the money in an eligible employer plan or an IRA.

    Qualified individuals whose plans did not adopt CRD provisions may choose to categorize other types of distributions — including those normally considered required minimum distributions — as CRDs on their tax returns (up to the $100,000 limit).

    Other Notable Changes

    For those who itemize deductions, the limit on the charitable gift deduction increased to 100% of AGI for direct cash gifts to public charities. For nonitemizers, a new $300 charitable deduction for 2020 and 2021 direct cash gifts to public charities is available. For joint filers, this deduction increases to $600 for 2021 cash gifts to charitable organizations.

    The floor for deducting medical expenses has been permanently lowered to 7.5% of AGI. Starting in 2021, there is no deduction for qualified tuition and related expenses. Instead, the modified adjusted gross income (MAGI) phaseout range for the Lifetime Learning Credit was increased to be the same as the phaseout range for the American Opportunity Credit ($80,000 to $90,000 for single filers; $160,000 to $180,000 for joint filers).

    A temporary provision that allows taxpayers to exclude discharged debt for a qualified principal residence from gross income was extended through 2025, though the limit has been reduced from $2 million to $750,000. Through 2025, employers can pay up to $5,250 annually toward employees’ student loans as a tax-free employee benefit.

    Yes, Unemployment Aid Is Taxable

    Both relief bills expanded unemployment benefits and provided them to many workers who normally are not eligible (including the self-employed, independent contractors, and part-time workers).

    Unemployment benefits, which sustained many families impacted by the pandemic, are considered taxable income, and many recipients may not have correctly withheld taxes from their 2020 payments. Avoiding a surprise tax bill typically requires opting into a 10% withholding rate and, in some cases, paying additional quarterly taxes during the year.

    © 2021 Broadridge Financial Solutions, Inc.

    Provided by Jakob Bower, Written by Broadridge

    The material provided does not necessarily reflect the views or opinions of Principal Financial Group®. Broadridge is not affiliated with any company of Principal Financial Group®.
    Principal Financial Group® does not endorse the commentary, opinions or views of the content.

    This material should be considered general information and should not be used as the primary basis for a financial decision.

    It is provided with the understanding that the member companies of the Principal Financial Group® are not rendering legal, accounting, or tax advice.

    Insurance products issued by Principal National Life Insurance Co. (except in NY), Principal Life Insurance Co., and the companies available through the Preferred Product Network, Inc. Securities and advisory products offered through Principal Securities, Inc., 888-774-6267, member SIPC. Principal National, Principal Life, the Preferred Product Network, and Principal Securities, Inc. are members of the Principal Financial Group®, Des Moines, IA 50392. Jakob Bower, Principal National and Principal Life Financial Representative, Principal Securities Registered Representative, Financial Advisor. Retirement Resource Group is not an affiliate of any company of the Principal Financial Group®.

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