Don't Mess With Taxes

Of course 2020 has multiple Fridays that fall on the 13th of the month. The year's first was on March 13, right when as a nation we were realizing that COVID-19 would define everything about this year, and beyond.

Back then, I offered 13 good luck tax breaks.

Today, Friday, November 13, 2020, arrives as we're dealing with a resurgence of the coronavirus.

So it seem appropriate to revisit that first list of 13 tax opportunities that could ease some of your tax fears on this traditional day of superstitions, while we're in the midst of a pandemic and beyond.

One of the biggest coronavirus pandemic concerns obviously has been money. Lots of people lost their jobs as businesses closed, some temporarily, other for good, as the virus hit the nation. That's could happen again with in this current resurgence, again affecting how we make and deal with the money we need for day-to-day living, as well as saving for the hopefully COVID-free future. Here are some ways the tax code and specific COVID-19 changes might be able to help.

1. COVID-19 economic relief payments: As the United States joined the rest of the world in looking for ways to cope with the pandemic and its economic effects, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law in late March. One of the key components of this measure was the extra money it provided most of us. A maximum of $1,200 was sent to individuals, twice that to married jointly filing couples and there was an additional $500 for eligible dependent minor children. Congress is struggling with a second round of COVID-19 stimulus; the House passed its version (the HEROES Act) in May, but the Senate was unable to respond. It's likely we will get more relief money, but when is the big question. In the meantime, the IRS is trying to distribute the original cash to the millions who didn't get the first round of relief payment. If that's you, you have until Nov. 21 to apply using the Internal Revenue Service's special Non-Filers: Enter Info Here online tool.

2. Earned Income Tax Credit (EITC): If you lost your job and were able to get unemployment, great. Remember though, that it's taxable income. Still, despite many politicians' concerns, that government assistance probably isn't going to get or keep you anywhere near your pre-layoff earnings. The tiny bit of silver lining here is that you may qualify for the Earned Income Tax Credit, which is adjusted each year for inflation.

The EITC, or sometimes abbreviated as the EIC (earned income credit), was created to help workers who make money, but not a lot of money. One misconception is that you must be parent to claim it. No. While the EITC is larger for families, its benefits are available to low- and moderate-income wage earners who have no children. This earlier post has specifics on the too-often overlooked EITC, which on 2020 taxes could be as much as $6,660 families with three or more children (it's $6,728 in 2021) or $538 this tax year for child-free single workers ($543 in 2021).

3. Child care cost revisions: Many workers take advantage of a workplace benefit that allows them to set aside pre-tax dollars to pay for child care. But since they spent at least some of this year working from home — and a lot of child care operations were closed due to COVID — they don't need as much money to pay those costs. The problem is that if they don't use the funds, they lose them. So the IRS earlier this year made temporary changes to extend parents' claims period for money socked away in their dependent care flexible spending accounts (FSAs). The also allowed taxpayers to make mid-year changes to their workplace benefits, something that usually isn't allowed unless you have a major life change. The IRS rightly decided the pandemic is a major life change.

4. Retirement savings credit: If while your worked, or are still on the job, you also may have been putting away tax-deferred money for your future retirement. Kudos for being able to think and act beyond COVID-19. Your planning for the future also might let you claim the Saver's Credit when you file your tax return. This tax credit could shave up to $1,000 off your tax bill if you contributed to an IRS-approved retirement plan, such as a traditional or Roth IRA or a workplace 401(k) plan. The biggest hurdle for many is the income eligibility limit. But again, if the pandemic has reduced your earnings, you just might qualify for it this year.

5. Tapping your retirement money early: While Congress grapples with how to provide additional COVID-19 financial relief, millions of Americans who lost their jobs due to the pandemic are trying to figure out how to pay bills due now. Those with a workplace retirement plan, typically a 401(k), likely are deciding whether they should tap that account. If you decide that's you best (or only) option, many companies allow for hardship distributions from tax-favored workplace retirement plans. The CARES Act also made changes here, providing for more favorable tax treatment for withdrawals from retirement plans and IRAs, as well as allowing certain retirement plans to offer expanded loan options. Check with your company about this possibility.

6. No required retirement withdrawals: Have you already retired? If you're living on, in part, your retirement savings, you're probably worried about how the pandemic is going to affect your nest egg longer term. Lawmakers shared your concern. Another CARES Act provision temporarily eliminated the required minimum distribution (RMD). For 2020, there's no mandated distribution for septuagenarians. Note, too, that the retirement overhaul law, the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was enacted at the end 2019, reset the RMD trigger age from 70½ to 72. These moves give your retirement investments a bit more time to recover from pandemic-produced problems.

COVID-19 has reshaped educational approaches. Schools, from elementary to high school to colleges, shut down. Then reopened. Then shut down again. And in-between established remote learning systems that have allowed in many cases for hybrid classes. Regadless of how you or your children get lessons, one thing remains. They cost, especially at the college level. Here are some tax breaks to help cover many educational costs.

7. American Opportunity Tax Credit (AOTC): This tax credit helps first-time college students (and their families if Mom and Dad claim it) cover some of the costs of the student's first four years of college or other higher education. There are income limits as to who qualifies for the AOTC, but if you can claim it, it could provide a tax credit, which is a dollar-for-dollar reduction in any tax you owe. Even better, it's a partially refundable credit, meaning if you wipe out your tax bill with it, the excess comes to you as a refund. In the AOTC's case, up to $1,000 of the overall $2,500 credit is refundable.

8. Lifetime Learning Credit: This tax credit is for anyone, not just the new students claiming the AOTC, looking to expand their knowledge. Again, there are restrictions based on earnings, but if you go back to college or even take a few courses to buff up your work-related skills, the Lifetime Learning credit could help shave your tax (you noted "credit" in the name, right?) by as much as $2,000 per tax return. Alas, it's not refundable.

9. Student loan interest deduction: Lots of students take out loans to cover colleges costs. This tax break, which is an adjustment to income found on Form 1040 Schedule 1, lets eligible taxpayers claim up to $2,500 interest on these educational loans. And yes, it's still called a deduction because the popular moniker for this tax break and many other similar ones was above-the-line deductions when they previously were listed at the bottom of the long Form 1040, just above the page's final line where adjusted gross income was entered.

10. Tuition and fees deduction: This is another above-the-line deduction. Here you can again claim up to $4,000 of specified schooling costs. Like the loan interest deduction, it reduces your income amount, which generally lowers your eventual tax bill.

11. 529 college payment plans: These education savings plans, named after the section of the tax code that created and governs them, have long been a popular tax-favored way for families to pay college costs. 529 plans are offered and administered by all 50 states and Washington, D.C. The account earnings grow tax-free and there's no tax due when the money is used to pay for IRS-approved education expenses, such as the costs of accredited colleges, universities, vocational schools and trade schools.

Plus, thanks to changes under the Tax Cuts and Jobs Act (TCJA), up to $10,000 per student per tax year from a 529 plan also can be used to pay elementary or secondary school tuition. This includes tuition for public, private and religious schools. And any unused 529 plan money can be rolled over into Achieving a Better Life Experience (ABLE) accounts.

One positive thing about the coronavirus pandemic (really!) is that it's shown how many of us want to help each other. The tax code has always offered benefits for donors. A new way was added this year.

12. Older donors' retirement money gifts: If you have a healthy retirement stash and you don't need it to cover current expenses, you can give some of it away. If you are at least 70½, you can donate up to $100,000 of your retirement account that usually is subject to RMD rules to an IRS-qualified charity. This donation must be directly transferred to the nonprofit via what is known as a Qualified Charitable Distribution or QCD. Taking this charitable step with your retirement money usually is a good way to meet your RMD as long as the charitable gift, again up to 100 grand, covers the amount you must take. But since you don't actually get the money — remember, directly transfer the funds to the charity without ever taking possession of it — the distribution isn't included in your adjusted gross income. Therefore, you don't own tax on it. But even in this year with no RMD, a donation could be a good strategy to reduce your eventually taxable tax-deferred account amounts.

13. Donation deduction for non-itemizers: One of the tax drawbacks for charitable taxpayers has been that you had to itemize to claim a deduction for your donations. That's changed a bit this 2020 tax year. But this year, the ubiquitous CARES Act expanded the donation deduction to those taxpayers who claim the standard deduction. On you 2020 taxes you'll file next year, you now can claim up to $300 in monetary gifts you make to qualified charitable organizations. Just remember to make sure that you follow all the other IRS rules on writing off charitable gifts.

I hope that some of these 13 tax breaks lessen your tax concerns, if not ladder or black cat or other Friday the 13th fears.

And if you're looking for a bit more Friday the 13th (and beyond) tax luck, do check out the March version, too. Some of the tax tips here also are in that post, but not all.

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