How COVID affects your taxes, from stimulus checks to unemployment and home offices

Hayley Fowler

The Internal Revenue Service will begin processing tax returns Friday — several weeks later than usual as the agency prepares to disperse leftover economic impact payments to qualifying individuals who didn’t receive them the first go-around.

But this tax season is different in more ways than one.

“Given the pandemic, this is one of the nation’s most important filing seasons ever,” IRS Commissioner Chuck Rettig said in a news release last month. “This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible.”

The IRS’s free online tool for filing taxes electronically opened Jan. 15, which the agency recommends using to get the quickest refunds. Tax refunds are slated to start going out the first week of March, and the deadline for filing 2020 taxes will be April 15.

Here’s what else to know about how the pandemic will — or won’t — affect your filing.

Stimulus checks

Millions of Americans received two economic impact payments, also known as stimulus checks, from the federal government last year — one for $1,200 and another for $600. But those payments are not a form of taxable income, Fortune reported.

Individuals who qualified for a refund check but didn’t receive one will get it in the form of a Recovery Rebate Credit when they file their 2020 tax return, according to the IRS.

That means it’s essentially an “advance on money you would have received as part of your refund,” Fortune reported.

Federal officials recommend individuals who haven’t received their stimulus checks file their taxes early, McClatchy News reported. That’s in-part because those who file electronically will get their refunds — and, by extension, their recovery rebates — within a few weeks.

With a third stimulus check on the horizon, some experts recommend people time their filing according to how their income changed between 2019 and 2020. The IRS will determine your eligibility based on your 2019 or 2020 taxes, whichever is the more recent one on record.

That means people who made less money in 2020 than they did in 2019 and might now qualify for a stimulus check should file sooner. Those who earned more in 2020 than 2019, however, may want to wait, according to McClatchy News.

Unemployment benefits

Unlike stimulus checks, unemployment benefits are taxed by the federal government. Those benefits include the $600 a week some people received under the Coronavirus Aid, Relief, and Economic Security Act.

The IRS has a tool to help individuals know what unemployed income will be taxed. It’s called “Are Payments I Receive for Being Unemployed Taxable” and takes an estimated 10 minutes to complete, according to the IRS.

PPP loans

Some small businesses struggling during the pandemic received Paycheck Protection Program loans to help keep them afloat. The loans were designed to be forgiven if they were used for certain qualifying business expenses, including payroll, rent, mortgage payments and utilities.

The IRS and Treasury Department previously announced eligible expenses paid for with money from the PPP loans can be deducted from your taxable income, financial advisor Dave Ramsey said on his blog.

More information on those guidelines can be found at https://www.irs.gov/newsroom/eligible-paycheck-protection-program-expenses-now-deductible.

Home office deductions

Millions of Americans have been working from home since the pandemic began in March.

While the IRS offers a home office deduction on taxes, it’s only available to businesses and individuals who are self-employed, the Associated Press reported.

Employees working from home aren’t eligible to claim the deduction — “even if an employer requires remote work because of COVID-19,” The Washington Post reported.

“Will people try to take the deduction this year because of what’s going on? I’m sure. But you increase your audit risk if you do,“ Erin Voisin, director of financial planning at EP Wealth Advisors, told the Post in September.

Other tax credits

The IRS encourages filers to check for available tax credits, which allow them to deduct from the taxes they owe. The IRS Interactive Tax Assistant helps users identify which tax credits may apply to them.

The largest refundable federal income tax credit is the Earned Income Tax Credit, which goes to low- or moderate-income filers.

It can be worth as much as $6,660 for a family with at least three children or $538 for individuals without qualifying children, according to the IRS. About one in five taxpayers who qualify for the Earned Income Tax Credit don’t know they’re eligible and subsequently miss out.

Congress enacted a temporary rule this year that allows taxpayers to use their income from either 2019 or 2020 to determine their eligibility for the EITC, TurboTax said.

Unemployment, however, isn’t considered earned income and would prevent individuals from qualifying for the EITC. That’s why Congress is “allowing taxpayers to pick which year’s income would yield the greatest benefit,” the AP reported.

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