Not only was life very different in 2020, but your taxes may be different, too. You may be eligible for some tax breaks that you never considered in the past if, for example, you lost your job, had new child care expenses while schools were remote, or did some freelance work and set up a home office.
Several new tax benefits took effect for 2020, too — such as a $300 tax break for charitable contributions if you don’t itemize, extra stimulus money if you had a child or reduced income in 2020, and a last-minute change that excludes $10,200 in unemployment benefits from taxes.
If your income dropped in 2020 — as it did for many people — these breaks can be particularly valuable. And a change in income may make you eligible for additional tax benefits that you earned too much to take in the past.
This is an important year not to keep your taxes on autopilot. Here are several tax breaks that you may have overlooked and that can help you save much-needed money after a challenging year. You have until May 17, 2021, to file your 2020 income tax return.
— Tax break for child care.
— Extra credit for retirement savers.
— Limited deduction for home office expenses.
— Tax breaks for freelancers.
— New deduction for charitable contributions.
— Tax credit for continuing education.
— Bigger breaks for college costs.
— Tax-deductible contributions to a health savings account.
— Tax exclusion for unemployment benefits.
— Extra stimulus money for 2020.
Tax Break for Child Care
In 2020, many families had extra child care expenses while their children went to school remotely. The dependent care tax credit can help. To qualify, you must have children under age 13 and pay for child care while you and your spouse work or look for work (or if one of you works and the other spouse is a full-time student). The cost of day care, a nanny, preschool, before and after school care and even summer day camp count toward the credit. This credit can be worth 20% to 35% of up to $3,000 in child care expenses if you have one eligible child, or up to $6,000 in expenses for two or more children.
The size of the credit is based on your income — the lower your income, the larger the credit — but there’s no maximum income cutoff. If you earned more than $43,000 in 2020, the credit can be worth up to $600 if you have one eligible child or up to $1,200 for two or more children. You can’t claim the credit for any expenses you paid from a dependent care flexible spending account at work.
To claim the credit, file Form 2441 with your tax return.
Extra Credit for Retirement Savers
Many people don’t realize that they can get an extra tax credit if they contribute to a 401(k), 403(b), IRA or other retirement savings plan — on top of any deduction they get for their contributions. To qualify for the saver’s credit in 2020, your adjusted gross income must have been less than $65,000 if married filing jointly, $48,750 if filing as head of household, or $32,500 if single. The credit can be worth up to $1,000 per person ($2,000 for married couples), at the lowest income levels. If you were laid off or your income dropped last year, you may qualify for this tax break for 2020 even if you usually aren’t eligible.
“For example, if a single taxpayer is laid off and their adjusted gross income falls below $19,500, then their saver’s credit would be 50% of the contribution, with a maximum credit of $1,000,” says Jean Wells, a certified public accountant and associate professor at the Howard University School of Business.
Young adults often overlook this tax break, too. To qualify, you must be 18 or older, can’t be a full-time student and can’t be a dependent on somebody else’s tax return. It can be a valuable break for people in their 20s who are just getting started in their careers and need an extra incentive to save for the future, says Michelle Morris, a certified financial planner and enrolled agent in Quincy, Massachusetts. She often recommends that clients help their working children contribute to a Roth IRA, which can grow tax-free for retirement.
Contributions to an ABLE account can also count for the saver’s tax credit, if the account owner is eligible for the credit, says Mary Morris, CEO of Virginia529, the agency that administers the national ABLEnow program. People of any age who developed a qualifying disability before age 26 can save in an ABLE account without affecting their eligibility for certain government benefits. See the ABLE National Resource Center for more information.
Limited Deduction for Home Office Expenses
A lot of people started working from home in 2020, but many of them are not eligible to deduct their home office expenses. The law changed in 2018 and eliminated the home office deduction for people who work for an employer. Now, you can only take the home office deduction if you have some self-employed income, but not if you’re an employee and are working remotely.
To qualify, you must use part of your home “regularly and exclusively” for business. Your home office doesn’t need to be a separate room, but it has to be an area where you don’t do anything else — it can’t be your kitchen table, for example. If you qualify, you can deduct a portion of your rent or mortgage interest, utilities and homeowners or renters insurance, based on the percentage of your home that you use as your home office. Or you can take the simplified option, which is calculated as $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500.
However, you don’t need to be self-employed full time to qualify. You may be able to take at least a partial home office deduction if you did some freelance, consulting or other self-employed work during 2020 — even if it was just for a few months between jobs. If you were self-employed for part of the year, then you may be able to take the home office deduction for the months you were self-employed.
“For example, if the taxpayer did consulting work from their home office from August to December, then the home office expenses would be prorated for the five months they worked from home,” says Wells.
To deduct home office expenses, file Form 8829 and report the expenses on line 30 of your Schedule C, where you report business income and expenses.
Tax Breaks for Freelancers
If you had any self-employed income in 2020 — whether you started your own business, did consulting while in between jobs or took on some freelance work to supplement your income — then you can deduct many of your expenses.
For example, you can deduct the cost of buying a computer for your business (based on the portion of time you use it for business), printer, secure modem, office furniture, file cabinets and even lighting for Zoom calls you make for your business. You can also deduct the cost of office supplies, advertising, business phone and Internet, website design and management and other expenses. You can deduct 57.5 cents per mile for business-related driving, such as driving to visit clients, attend meetings or other work-related driving aside from commuting.
Several apps make it easy to track business mileage, says Morris, who uses the Everlance app. “It records every trip I take in my car, and I swipe one way for work and the other way for not work, and it creates a spreadsheet that you can export to your tax preparer,” she says.
You can also make tax-deductible contributions to a self-employed retirement plan, such as a Simplified Employee Pension (SEP) or a solo 401(k), based on your business income. Freelancers can contribute about 20% of their net income from self-employment, up to a maximum of $57,000 in 2020. Or you may be able to save more in a solo 401(k). You can contribute up to 100% of your self-employed income, with a $19,500 maximum in 2020 (or $26,000 if 50 or older). If you earn more than that, you can contribute about 20% of your net income from self-employment, as long as your contributions don’t exceed the $57,000 limit (or $63,500 if 50 or older).
For more information, see the IRS Self-Employed Individuals Tax Center.
New Deduction for Charitable Contributions
You generally have to itemize your deductions to get a tax break for charitable contributions. That benefit is still available for itemizers. But people who take the standard deduction may be able to get a tax benefit for charitable contributions for 2020, too. The Coronavirus Aid, Relief and Economic Security (CARES) Act allows taxpayers to deduct up to $300 in charitable contributions in 2020, even if they don’t itemize. To qualify for the deduction, your gift must be made in cash (not appreciated stock or other assets) and must go directly to the charity, not to a donor-advised fund, says Michael Eisenberg, a certified public accountant in Encino, California.
Tax Credit for Continuing Education
You may be eligible for a tax credit if you took continuing education classes in 2020 — which many people did if they had reduced hours or were unemployed, says Wells. You can take the Lifetime Learning Credit for undergraduate or graduate classes, certificate programs or continuing education classes at an eligible educational institution — even if you aren’t working toward a degree. The credit is worth 20% of up to $10,000 in eligible expenses, with a maximum credit of $2,000 per tax return. Eligible expenses include tuition and fees that are required for attendance for yourself, your spouse or a dependent you claim on your tax return.
To qualify for the full credit in 2020, your modified adjusted gross income must be less than $59,000 if single or $118,000 if married filing jointly; you can get a partial credit if you earn up to $69,000 if single or $138,000 if married filing jointly.
For more information, see IRS Publication 970 Tax Benefits for Education.
Bigger Breaks for College Costs
If you’re paying for the first four years of college for yourself, your spouse or a dependent you claim on your tax return, you may be eligible for a bigger tax break. The American Opportunity Credit can cut your tax liability by up to $2,500 for the first four years of higher education. To qualify for this credit, the student must be enrolled at least half time and pursuing a degree or other recognized educational credential at a college, university, vocational school or other eligible postsecondary educational institution.
To claim the full credit, your modified adjusted gross income must be $80,000 or less if single or filing as head of household, or $160,000 or less for married couples filing jointly. You can receive a partial credit if your income is less than $90,000 if single, or $180,000 if married filing jointly. The credit is calculated as 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 — making the maximum credit $2,500 per student.
Tax-Deductible Contributions to a Health Savings Account
If you had an eligible health insurance policy in 2020 with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage, then you can make tax-deductible contributions to an HSA. If you had an HSA-eligible health insurance policy for all of 2020, then you can contribute up to $3,550 if you had self-only coverage, or up to $7,100 for family coverage, plus an extra $1,000 if you were 55 or older. If you only had an eligible policy for the first part of the year, then your contributions are pro-rated based on the number of months you had the coverage.
Tax Exclusion for Unemployment Benefits
Unemployment benefits are generally taxable, but the American Rescue Plan Act of 2021, the relief bill that was signed on March 11, 2021, exempted up to $10,200 in unemployment benefits from income taxes for 2020. To qualify for the exemption, your adjusted gross income for 2020 must have been less than $150,000. If two spouses both received unemployment benefits, they can each exclude $10,200 from their income as long as they are under the $150,000 cutoff, which applies to both married and single filers.
People who haven’t filed their income tax returns yet can use the IRS’ new instructions and worksheet to benefit from the exclusion when they file their returns. Software companies are updating their systems now. H&R Block for example, has now updated its systems for the new exclusion, both for their DIY products and when working with a tax professional.
For people who had already filed their 2020 income-tax returns before the exclusion was passed, the IRS is trying to figure out how to make this change for eligible taxpayers automatically and is strongly recommending that they not file an amended return to take advantage of the exclusion at this time.
States that usually tax unemployment benefits are deciding what to do now, too. Some automatically follow federal rules, and others may need to take action to allow the exclusion or to elect out of allowing the exclusion. “Some states have not conformed, or they have not conformed yet,” says Susan Carlisle, a certified public accountant in Los Angeles. If you received unemployment benefits in 2020, keep an eye on new developments from your state department of taxation, and make sure you get credit for the federal exclusion, too.
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Extra Stimulus Money for 2020
The stimulus payments received in 2020 are not taxable, but you may qualify for additional money when you file your return if you experienced certain life changes. The stimulus payments were technically an advanced payment of a special 2020 tax credit, based on your 2018 or 2019 income — your most recent tax return on file when they calculated the stimulus payments. If your income was higher in 2020, you didn’t have to pay back the stimulus payment. However, if your income was too high in 2018-2019 to qualify for the stimulus but then it dropped to within the adjusted gross income thresholds in 2020, you will receive the credit when you file your 2020 tax return. Also, you may receive additional stimulus money when you file your return if you had a baby in 2020. You’ll claim the additional money, called the recovery rebate credit, on line 30 of your 1040 tax form.
“To get extra stimulus money because of a change in your income or other circumstances, file your 2020 returns right away,” says Carlisle.
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Update 03/26/21: This story was published at an earlier date and has been updated with new information.