It’s Complicated! Important Must-Knows for Filing Your 2020 Taxes
One big takeaway this year is that it's in your best interest to pay off your bad debt, like credit cards, as soon as possible. There’s no tax benefit to keeping that around.
Bobbi Rebell, CFP®
Personal Finance Expert at Tally
April 7, 2021
Let’s kick things off with some good news If you’re stressing about paying your taxes on time, you have a bit of extra wiggle room this year! The IRS has been very busy sending out stimulus checks and is a bit behind. That’s buying us all some extra time. A very welcome extension has been granted and, as a result, federal tax returns aren’t due until May 17. However, many state taxes have a completely different deadline, and in fact could change between now and then... These potentially differing deadlines present another wrinkle in an already unique tax season. This is especially true if you received a stimulus check or PPP loan, froze your student loan payments, or were able to get a forbearance on your mortgage in 2020.
Before you dive into your taxes this year, let’s go over a few of the most common pain points you may run into when filing your 2020 tax return. There are things we all could overlook since this tax season is so different than what most of us have experienced.
Don’t Make Assumptions about All Tax Deadlines
Tax deadline extensions are a great option. But, they also create confusion. This can be amplified if your state is following a different tax deadline than the new federal extension or if you need to pay self-employment taxes which have a different deadline
So — when does tax season end this year? The deadline to file your federal taxes has been postponed about a month to May 17, 2021, but when it comes to state taxes, the deadlines vary by state. As of this writing, 37 states have pushed back their tax filing deadline to May 17 or later. But there are exceptions to the rule because some states offer special extensions for those who are victims of the recent winter storms. Of course, as is always the case you can file for an extension, which will give you more time to file. You still have to pay what you owe on time or face interest and penalties.
And there is a big warning for entrepreneurs or anyone who works for themselves. If you’re self-employed, it’s important to note that you’ll still need to make your self-employment tax payments on April 15, 2021 as usual.
Are Stimulus Checks Taxable?
There is misinformation floating around that any stimulus money you received in 2020 will count as a part of your income. Luckily, that’s not the case. The coronavirus relief check that some people received from the federal government does not count as income. It’s actually considered an advance payment on a tax credit.
But what if you didn’t receive any stimulus money? In some cases, this may be because you didn’t qualify to receive it. If you were entitled to the money and didn’t get a stimulus check or the full amount, you might be able to get the money when you file your 2020 tax return. There’s a new line on the federal tax return form called the “Recovery Rebate Credit” where you can claim your money.
How Will PPP Loans Affect Taxes?
Similar to the stimulus checks, Paycheck Protection Program (PPP) loans may affect taxes this year for eligible employers, especially when it comes to deducting business expenses. The relief act signed last December specifies that business expenses paid with your PPP loan are deductible for your 2020 tax filing. This deduction does not extend to business taxes, though. Another issue that affects the taxes of small businesses that received PPP loans is whether those loans were forgiven or not. Loans that will be forgiven will not be taxed at the federal level. The states have so far had different approaches, so it is important to find out how your state is treating them.
Student Loan Interest is Still Deductible
Even if you froze your student loan payments at any point last year, most likely you made a few monthly payments in 2020 before freezing your student loans became possible under the CARES Act that passed last March. The good news is, you’ll be able to deduct the interest on those payments. Student loans are considered “good” loans when it comes to taxes. This means you can deduct the interest, which can help you get a larger tax refund.
A friendly reminder — don’t forget that freezing your student debt does not cancel that debt. It’s just delayed for a while, so you still have to pay it back eventually.
Understand Your Forbearance-Related Deductions
So, what’s the deal with your non-student loan forms of debt? How forbearance on the debt will affect tax deductions depends on whether the debt is viewed as “good” debt or “bad” debt. For example, mortgages are considered good debt. The interest on any payments you make on a mortgage are tax-deductible. However, if you were like the tens of thousands of Americans who did a cash-out refinance last year to build up their cash cushion, or got a HELOC, only the portion of your loan that went towards improving your house can be counted in your tax deduction. This often catches people by surprise because it’s a fine print detail that’s only been around for a couple of years.
Bad debts such as high-interest credit cards, auto loans, and personal loans have no tax benefits. If you took on these loans or got a forbearance on these loans, there are no tax implications for 2020 and the interest is not deductible.
The big takeaway when it comes to debt this year is that it is in your best interest to pay off your bad debt, like credit cards, as soon as possible. There’s no tax benefit to keeping these credit cards or loans around. They are expensive and they take away from your ability to save and invest, so you may want to consider using a tool like Tally to help you manage and pay off your credit cards faster.
Learn more about how Tally can help make getting rid of your credit card debt faster and easier today!