Taxes can be confusing in an average year, but the Covid-19 pandemic has created additional bewilderment. Many of us are trying to navigate remote schooling, job furloughs, and learning how to work remotely — we’ve been busy arranging (and rearranging) our entire lives to adjust, and now tax season has snuck up on us. Whether you received unemployment income last year, were a recipient of any of the Covid-19 relief funds, or are simply just trying to figure out taxes as a new parent, you might have questions. To simplify the process — and get you some answers — we’ve put together a guide for parents navigating the 2020 tax season.
Taxes if you welcomed a baby in 2020
The good news is that any baby born by December 31, 2020 can be claimed by parents who are eligible for the Child Tax Credit, which offers up to $2,000 per qualifying child. (See our glossary below for a more detailed explanation of various relevant credits.) You will need your baby’s social security number to claim them. But, a head’s up: Bernadette Harris, CEO of By the Book Accounting in Braselton, Georgia, says it may take longer to receive your baby’s social security card this year; she tells Romper she’s heard about delays in the process. “Parents need to stay on top of getting the social security number,” she says, because you won't be able to file your tax return without it.
The application for your child’s social security number is normally processed when you fill out your child’s birth certificate at the hospital. If you had a home birth and haven’t already, you should contact your county ASAP to find out how to register your birth and receive a birth certificate and social security card.
Also, if you had a baby in 2020 and you were eligible to receive a stimulus payment for that baby (individuals making $75k per year and couples making up to $150k per year were eligible), you will want to claim the baby on your taxes so that you can get the check. Lisa Green-Lewis, a CPA for TurboTax, explains that when the government issued the stimulus payments, “they went by your previous tax filing” — looking either at 2018 or 2019. So, she says, you should be able to claim the additional stimulus payments for the baby that you had in 2020.
And depending on whether you took paid or unpaid family leave following the birth of your child, your taxes can be affected. For example, if your employer withheld taxes in 2020 over the duration of your unpaid leave, that will get returned to you when you file.
These credits are not only for biological children! Babies who joined your family via adoption of foster care are also eligible for the Child Tax Credit, and may also be eligible for the Adoption Credit, which is worth up to $14,300 per child.
Claiming children under the age of 17
Children up to the age of 17 (i.e., who were under 17 on the last day of the tax year) are eligible for the Child Tax Credit. In situations where parents are divorced, or do not live together, the custodial parent with whom the child lives for more than half of the year will get the credit. (Noncustodial parents can claim the child if the custodial parents agrees and signs Form 8332, the Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.)
Tax credits for children can be affected by how much you earned in 2020. The latest Coronavirus relief package, passed in December, included a provision allowing you to use your 2019 income to qualify for more income tax credit, because many people were unemployed or worked reduced hours in 2020, according to Green-Lewis. “Sometimes when you have a lower income, it can lower your credit (there’s a whole calculation behind it). So because of this, the IRS passed a provision [for that].” This will be helpful to parents who earned unemployment in 2020. See more on that below.
The IRS has an Interactive Tax Assistant tool called “Is My Child a Qualifying Child for the Child Tax Credit?” to help you taxpayers determine if a child qualifies for this credit.
You can find Earned Income and Earned Income Tax Credit Tables here.
Whether or not to claim children age 17 and older on your taxes
You can only claim children age 17 or 18 as dependents if you provide more than half of their support. However, children over the age of 17 whose parents claim them on their taxes are not eligible for a stimulus check. Therefore, as Harris explained, “there are some [situations] this year where it will make more sense for the child to claim themselves, depending on how much money they made. I had a client whose college student made $15K in 2020. In that scenario, it was better for the college student to claim themself so that they could get a stimulus payment.” Sometimes the amount of money your child will receive via a stimulus check is greater than the amount you would save on your taxes by claiming them.
A single person under the age of 65 must file taxes if they made $12,400 or more in a given year. Most college students do not earn this amount, however it may still be beneficial for them to file their own taxes because they may get a stimulus check and tax refund. For 2020, it may make more sense not to claim your children on your taxes. You may want to have your tax consultant review your taxes with you (or if you do your taxes yourself, run it through the software before you file) to determine which option would be better. Since this year is unique, it may be helpful to consult with a tax pro even if you normally prepare and file your taxes yourself.
If you received (or didn’t receive) Covid relief aid
Checks or debit cards that were mailed out or direct-deposited due to the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) in March or due to the second round of Economic Impact payments are not considered to be taxable income. However, if you did not receive one, but are eligible, you may be eligible to claim the Recovery Rebate Credit on your taxes. This credit can be used for any stimulus payments you have not received.
“You will report what you received for the first payment and how much; what you received for the second payment and how much,” explains Danielle White, an MBNA and a partner at DW Financial Services, Inc. in Jenkintown, Pennsylvania. “If there was a shortage, [the IRS] will credit that amount back to your tax return immediately.”
Even if you do not normally file taxes, you will have to file this year, and claim the Recovery Rebate Credit, if you haven’t received last year’s stimulus payments and you want to receive what you are eligible for, in the form of a tax return. Although any new stimulus payments are currently still under negotiation as of the publication of this article, they will still be based off of your income tax return.
If you were unemployed in 2020
Unemployment income is taxable income; you will receive tax form 1099G if you received unemployment this year. However, unemployment is considered by the IRS to be unearned income, meaning that if you only have unemployment income, you will not qualify for the Earned Income Credit, a credit that low to moderate earning families can claim, which many parents rely on.
However, there is a workaround for this. According to White, the Child Tax Credit and the Earned Income Credit will have exceptions for this year to support parents who were unemployed: if you earned more in 2019 than you did in 2020, you can use your 2019 income to determine whether or not you qualify.
If you made a retirement account withdrawal in 2020
Normally, there is a 10% tax penalty for individuals who elect to take an early withdrawal from a retirement account. However, as part of the CARES Act, the IRS is waiving it this year for coronavirus-related distributions, although you will still have to pay taxes on money that you withdrew. “As a parent, I took money out of my 401k because things were tight,” says White. “There are special rules for individuals who took coronavirus distributions from their 401k.”
To eliminate the tax penalty, White says to use form 8915-E when you report your retirement plan activity, based on the 1099-R you will have received in the mail. “Also, on that form, you are able to spread out your tax liability over three years, but you have to elect to do it,” she explains. When you withdraw from your retirement account, your distribution amount is included in your taxable income for the year. So if you withdrew $100k (the maximum amount for a coronavirus related distribution), you would normally have to report the full $100k as taxable income. This year, you would be able to split the $100k over the next three years.
Important tax credits to understand:
Tax credits can get a little bit confusing, particularly when you are trying to figure out the difference between refundable and nonrefundable taxes. Basically, a nonrefundable tax credit will only reduce your tax liability, it will not create a refund. A refundable tax credit will tack on an additional refund beyond just reducing your tax liability.
Earned Income Tax Credit
The Earned Income Tax Credit is a refundable tax credit for low to moderate income families. The income limit varies based on whether or not you are married and how many dependents you claim, but, for example, according to the IRS Earned Income Tax Credit table, a married couple with one child would be eligible for the Earned Income Tax Credit if they earned less than $48,108 total. Married couples filing individually are not eligible for the earned income tax credit.
Child Tax Credit & Credit For Other Dependents
The Child Tax Credit and the Credit for Other Dependents are nonrefundable tax credits that reduce your overall tax liability. The child tax credit can be used in conjunction with the Additional Child Tax Credit which is a refundable tax credit. The definition of a dependent is fairly flexible; as Green-Lewis said, “you can claim relatives, you can even claim friends as a dependent. There are various rules for it.” A dependent could include a child over the age of 17 for whom you provide more than half of their support or a qualifying relative who earned less than $4300 and for whom you provide more than half their support. “Relatives don’t have to live with you, but if it’s a friend, they have to have lived with you for the entire year,” explains Green-Lewis.
Child And Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is a nonrefundable tax credit that you can use to claim expenses related to the care of a child or another dependent. This includes day care and preschool tuition.
Recovery Rebate Credit
If you didn’t get the full Economic Impact Payment, you may be eligible to claim the Recovery Rebate Credit.
Adoption Credit
Adoption Credit: Per the IRS, tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance. The maximum amount (dollar limit) for 2020 is $14,300 per child.
Important tax dates to know:
April 15 is the deadline by which you must file your taxes or request an extension.
September 15 will be your tax deadline if you get an extension.
The IRS opened for E-Filing on Feb 12, so you can now process your tax returns electronically. “Electronically is the best way to file, as the post office seems to be backed up, and electronically is the best way to get your refund,” says Larson. According to Greene-Lewis, when you E-File your taxes, it automatically checks the social security number, which will ensure that you entered information for yourself or your dependents correctly.
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