In brief, says an IRS spokesman, the saver should report the required withdrawals on Line 4a for most IRAs and 5a for most other accounts. Then, if the saver put all the payout back, record a zero on Line 4b or 5b, and write the word “rollover” next to that or check the box on the software. If part of the payment wasn’t put back in, then put that amount on Line 4b or 5b instead of a zero. Note that this fix applies to required withdrawal amounts, not amounts greater than that.
So far Congress has not suspended required minimum distributions for 2021.
• If you take the standard deduction and made a charitable donation up to $300. Congress is allowing filers to deduct up to $300 in 2020 charitable donations per tax return if filers don’t break out deductions on Schedule A. For 2021, this deduction rises to $300 for singles and $600 for couples filing jointly.
Caveat: These donations must be cash—by check, credit card, or similar transfer. They can’t be property such as used clothing or furniture.
• If you worked remotely in a state different from your usual one. You may have to file a tax return, and perhaps pay taxes, to more than one state. This highly complex area, with rules that vary from state to state, will pose problems for many telecommuters whose offices closed in 2020. Some states also have special pandemic rules that will add more complications.
Tempted to fudge it? Think again. Employers and tax preparers are unlikely to risk severe consequences by filing incorrect forms with tax authorities, and do-it-yourself filers should remember that tax returns are signed under penalty of perjury. For more on state taxes on remote work, see this link. Taxpayers with large amounts at stake should consider professional help.
• If you didn’t get stimulus payments you’re eligible for. Congress has so far made two rounds of stimulus payments totaling up to $1,800 per adult and $1,100 per dependent under 17. These payments began to phase out at $75,000 of adjusted gross income for single filers and $150,000 for married joint filers. Lawmakers may soon enact a third round of $1,400 payments for many people.
The first two rounds were structured as upfront payments of a tax credit for 2020, but they were determined by income on filers’ 2018 or 2019 returns. As a result, some taxpayers can claim full or additional payments based on their 2020 tax return—say, because their income dropped into the eligibility range or they had a child. This is known as a Recovery Rebate Credit, and it’s on Line 30 of the 1040 and 1040-SR forms. There’s a worksheet to determine amounts due to the taxpayer.
According to the IRS, the normal rules on tax refunds typically apply to Recovery Rebate Credits, so people who owe back taxes or child support may not receive the full amount they claim. Stimulus payments and Recovery Rebate Credits aren’t taxable, and in most cases overpayments don’t need to be returned to the IRS.
The third round of stimulus payments will likely be based on 2019 or 2020 tax returns—whatever is available when payments are made. That could give taxpayers an incentive to file sooner if they want their 2020 information used and to wait if they want payments based on 2019 returns. However, Congress may instruct the IRS to “top up” payments later this year based on 2020 tax returns if people qualify for more than they received earlier.
• If you withdrew up to $100,000 from your retirement plan because of Covid-19. Congress allowed many people affected by the pandemic to make withdrawals in 2020 of up to $100,000 from retirement plans such as 401(k)s, IRAs, and Roth IRAs, and lawmakers waived the 10% penalty on early withdrawals that applies in many cases. Fewer than 1 in 10 plan participants made such withdrawals, according to several large sponsors of these plans.
But the withdrawals themselves are taxable, unless the saver returns the money to that account or a similar one. Income from the withdrawal is spread over three years, but there is room to strategize—such as by accelerating income from the payout.
For example, say that a saver affected by the pandemic withdrew $60,000 from his IRA last year and had little other income for 2020. If he thinks he isn’t going to put the money back, it might lower his overall taxes to declare the entire $60,000 as 2020 income—as opposed to spreading it over three years.
So far Congress has not authorized such Covid-related withdrawals for 2021.
• If you received unemployment benefits. Unemployment compensation is taxable, and recipients should receive a Form 1099-G reporting the 2020 total to the IRS. Withholding for taxes, if any, should appear on the form as well.
