New credits and deductions plus other things you need to watch out for.
Tax season is February 12, 2021, to May 17, 2021
A new $300 deduction for charitable donations is available to almost everyone
Self-employed workers have access to two new tax credits, plus maybe the home office deduction
You need to pay income tax on unemployment benefits and income on 1099 forms
Tax season 2021 — when you file your income taxes for the 2020 tax year — officially started on Feb. 12, 2021. Filing your taxes will mostly be the same as it was last year, but there are a few changes to the tax code that you should know about. For example, the CARES Act, passed by Congress in 2020 to combat the coronavirus pandemic, created multiple new tax credits and tax deductions for individuals. Small business owners and certain self-employed individuals also received new tax breaks thanks to the Families First Coronavirus Response Act (FFCRA).
The 2021 tax season is February 12, 2021, to May 17, 2021 (Tax Day). Last year’s tax season was extended by three months, but tax season 2021 has not been extended and if you file after the May 17 filing deadline, you may have to pay interest or fees. If you need more time to file your taxes, consider requesting a tax extension.
In general, it’s a good idea to file your taxes as soon as you can. Filing early not only gets any tax refund into your account sooner, it can also help you avoid tax fraud. However, some taxpayers may be tempted to wait until the end of February, at which time Congressional Democrats hope to have passed a new coronavirus stimulus bill.
It’s possible that stimulus check eligibility will be determined by your 2020 income if you already filed this year, but your 2019 income if you haven’t filed 2020 taxes yet. (This is similar to how the last stimulus checks were handled.) The official language of the bill hasn’t been finalized yet, but it looks like individuals with income of up to $75,000 will receive a full $1,400 check. For someone whose 2019 income would qualify them for a full check, but their 2020 income wouldn’t, waiting until March to file federal income taxes may be an option to consider.
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There are multiple new tax credits this year because of law changes from COVID-19 relief legislation. This includes a couple of credits for self-employed individuals. There are also potential benefits for parents and low-income individuals who lost income in 2020.
Most eligible Americans already received their coronavirus stimulus checks for 2020 (also known as recovery rebates or economic impact payments). But if you were eligible for a check and never received it or didn’t receive as much as you should have, you can claim the recovery rebate credit on your 2020 tax return.
To be eligible for a payment, you generally need a valid Social Security number and you need to meet the income requirements. Learn more about eligibility in our guide to the coronavirus stimulus checks.
The new credit for sick leave for self-employed individuals allows certain self-employed workers to receive a refund of up to $200 per day if they couldn’t work for any period between April 1, 2020, and December 31, 2020, because they were sick with COVID-19. Self-employed individuals who couldn’t work for a period because they needed to care for a family member with COVID-19 can claim the credit for family leave for self-employed individuals. The sick leave credit and family leave credit are both refundable tax credits. Claiming them requires using IRS Form 7202, which is a new form created for this year.
These two credits will also be available next year on your 2021 taxes for sick leave and family leave taken in 2021. If you’re a small business owner, you may qualify for two similar credits that apply to employees of small businesses instead of self-employed people.
For your 2020 taxes, which you file in early 2021, the child tax credit (CTC) allows parents to claim a tax credit of up $2,000 for each eligible child under the age of 17, but if your maximum credit is worth more than your tax liability (the total income tax you owed for the year) then you can get up to $1,400 refunded to by claiming the additional child tax credit (ACTC).
To determine eligibility for the 2020 ACTC, filers have the option to use either their 2020 or 2019 income, whichever is greater. (You may see this called the “lookback option.”) Having a higher income doesn’t usually earn you a higher ACTC, but the CTC and ACTC both require a minimum earned income of $2,500. So if your 2019 income was above $2,500 but your 2020 income wasn’t, using your 2019 income could allow you to qualify for the credit.
For 2021 taxes, which you won't file until early 2021, the child tax credit has been increased and you could receive up to half the credit as advance payments. You can learn more about the 2021 CTC here.
Similar to the child tax credit this year, individuals can opt to use either their 2020 or 2019 income to calculate eligibility for the earned income tax credit (EITC). This lookback option may be helpful if you didn’t have any earned income in 2020. You can only claim the EITC if you had earned income during the year. For more help on what qualifies as earned income and how to claim this credit, here’s our guide to the EITC.
There is a new and expanded charitable contributions deduction, plus the deduction for unreimbursed educator expenses has been expanded to cover costs related to the coronavirus pandemic. Other deductions, like the home office and medical expense deduction, may have also become more relevant to some workers.
Learn the difference between tax credits and tax deductions.
In March 2020, the CARES Act created a new $300 charitable contributions deduction that’s available to all taxpayers who claim the standard deduction. You can claim this deduction right on your Form 1040 without the need for additional tax forms. Unfortunately, taxpayers have the same $300 limit whether their filing status is single or married filing jointly.
In previous years, you could only deduct charitable donations if you itemized and you claimed the official deduction for charitable contributions. If you do itemize, the normal charitable deduction has also been expanded. Instead of the previous deduction limit of 50% of your adjusted gross income (AGI), itemizers can now deduct an amount equal to 100% of their 2020 AGI. (Corporations can now claim deductions worth up to 25% of their AGI, up from 10% last year.)
Certain teachers and educators can deduct up to $250 of unreimbursed expenses related to their jobs. This isn’t a new deduction, but it has been expanded for 2020 to include coronavirus-related expenses. So if you’re a K-12 teacher, teacher’s aide, counselor, or principal, you can deduct up to $250 of unreimbursed expenses for face masks, hand sanitizer, disposable gloves, paint or chalk used to guide social distancing, and other items recommended by the CDC. Use Form 1040 Schedule 1 to claim this deduction.
If you were self-employed and worked from home in 2020, you may be able to claim the home office deduction. This isn’t a new deduction but it may be relevant to more people this year. If you qualify, possible deductible expenses include office supplies, the cost of a desk or other furniture, some utility bills, and some renters insurance.
To qualify, you must have a space in your home that’s reserved strictly for work. It doesn’t need to be a full office — it could be a spare room, half a room, or just a nook — but it cannot be a space you also use for non-work purposes. For example, a spare bedroom that you sometimes work in and sometimes rent out wouldn’t qualify. Unfortunately, the Tax Cuts and Jobs Act of 2017 also restricted this credit to self-employed workers.
Learn more about who benefited from the Trump tax changes.
The medical expense deduction allows people who itemize their deductions to deduct any medical and dental expenses that exceed 7.5% of their AGI. While this isn’t a new deduction, the AGI threshold for this deduction was initially supposed to increase to 10%, but Congress opted to extend the 7.5% threshold from last year.
Medical expenses due to COVID-19 care do qualify you for the medical expense deduction, but they may need to be significant since only filers who itemize have access to this deduction. In order to itemize, your total itemized deductions must be worth more than the standard deduction, which is $12,400 for single filers and $24,800 for joint filers in 2020.
Learn more about how to itemize deductions.
Filing 2020 taxes may be a bit more difficult for many taxpayers because either their total income changed dramatically or their income sources changed. Below are a few situations you may need to consider as you file.
If you lost your job and received unemployment insurance, it’s important to know that you need to pay income tax on unemployment benefits. When you first applied for benefits, you had the option to withhold taxes or receive the whole benefit amount. If you opted to withhold income taxes, you generally won’t owe much more on Tax Day. If you received the full benefit, you may owe a tax bill when you file your return.
Unemployment benefits are reported to you on a copy of 1099-G, so make sure you have that form ready before filing.
If you worked as an independent contractor or freelancer in 2020, your income will probably be reported on Form 1099-MISC or 1099-NEC. Income on a 1099 form hasn’t been taxed yet, which means you may owe all of the federal income taxes on that money when you file your return (unless you filed estimated taxes throughout the year).
If you’re a contractor for a ride-share company, read our guide to paying taxes as an Uber or Lyft driver.
Even with the pandemic, the stock market saw record gains in 2020 and home prices skyrocketed in some places as mortgage rates hit record lows. If you traded any stocks or otherwise sold valuable property, you may need to pay capital gains tax this year.
You likely need to pay capital gains tax for 2020 if
You sold stocks, bonds, or other investments for a profit (including people who bought GameStop stock).
You sold other valuable property, including cryptocurrencies like Bitcoin and Dogecoin.
You sold your house for significantly more than your original purchase price.
Because of the CARES Act, certain individuals could withdraw up to $100,000 from a 401(k), IRA, or other retirement account in 2020 without paying the normal 10% early withdrawal penalty. Required minimum distributions (RMDs) were also suspended for 2020, so there are no penalties for missing RMDs. You were generally only eligible for these tax benefits if you lost income or had reduced work hours because of a COVID-19 diagnosis.
Importantly, any money you withdrew early from your retirement account is still subject to income tax. If you cannot pay the whole tax bill right now, you can choose to spread the taxes over the next three years (paying one-third each year).
Read more on investing during a pandemic.
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