How Coronavirus Relief Programs Will Affect Your 2020 Taxes

Summary

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Episode Overview

Podcast: WSJ Your Money Briefing
Episode: How Coronavirus Relief Programs Will Affect Your 2020 Taxes
Date: January 5, 2021
Host: J.R. Whalen
Guest: Laura Saunders (WSJ Tax Reporter)

This episode addresses the significant ways in which various 2020 coronavirus relief measures—like stimulus checks, expanded unemployment benefits, changes in retirement account rules, medical and childcare expense deductions, and business meal deductions—will impact how Americans file their 2020 tax returns. WSJ tax reporter Laura Saunders provides practical explanations aimed at reducing confusion for taxpayers navigating new policies.

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Key Discussion Points & Insights

1. Are the 2020 Stimulus Payments Taxable?

• Not Taxable

  • Stimulus payments received in 2020 are not considered taxable income.
  • Recipients will not receive a 1099 or other tax form regarding these payments.
  • Quote:
    • “No, it is not taxable, period.” — Laura Saunders [01:51]

• Retirement Account Impact on Stimulus Eligibility

  • The suspension of mandatory IRA withdrawals for retirees in 2020 lowered many individuals' incomes, making some eligible for stimulus payments when they file their taxes.
  • Quote:
    • “That meant that...their income, which was high in 2019, dropped significantly in 2020. And they will now find that they qualify for the stimulus payments when they file their taxes.” — Laura Saunders [02:19]

2. Unemployment Benefits & Taxation

• Taxable Income
  • All unemployment benefits received in 2020 are taxable.
  • Expect to receive Form 1099-G from the state; report this income.
  • Quote:
    • “Unemployment benefits are generally taxable...people who got them can expect to receive a form 1099-G from the payer.” — Laura Saunders [03:18]

3. Medical Expense Deduction Threshold

• Lower and Permanent Threshold
  • Congress set the threshold for deductible unreimbursed medical expenses at 7.5% of adjusted gross income, permanently (lower than a proposed 10%).
  • Applies to those with high medical costs—e.g., people in nursing homes.
  • Quote:
    • “Congress finally made a permanent provision that the threshold is 7.5%, which is better for people than 10%.” — Laura Saunders [03:56]

4. Flexible Spending Accounts (FSAs) and Dependent Care

• Carry Over Permitted—If Employer Opts In
  • Recent legislation allows employers to let employees carry over unused FSA and dependent care account funds from 2020.
  • However, companies must actively opt in.
  • Quote:
    • “The companies now have the ability to provide relief or loosen the rules. But the companies have to opt into what Congress did...So they should lobby their employer to opt into this.” — Laura Saunders [05:25]

5. Charitable Donation Deductions

• $300 Deduction for Non-Itemizers
  • For 2020, anyone who does not itemize deductions (i.e., most taxpayers) can deduct up to $300 in charitable donations.
  • For 2021, singles can deduct $300, married couples up to $600.
  • Quote:
    • “Congress said that people who don't itemize...can take a deduction for $300....for 2021...married couples can get up to $600.” — Laura Saunders [05:55]

6. Retirement Account Withdrawals Due to COVID-19

• Relief for 2020 Only
  • In 2020, individuals could withdraw up to $100,000 from IRAs or 401(k)s without penalty (even if under age 59½) and pay taxes over three years or pay it back.
  • This relief was not extended to 2021 for COVID-19, though it remains for other disasters (e.g., natural disasters).
  • Quote:
    • “Last year, because of COVID, Congress allowed people to take out up to 100,000 dollars...they don’t owe a 10% penalty if they're under 59 and a half...Congress has not extended this relief into 2021.” — Laura Saunders [06:48]

7. Business Meal Deduction

• 100% Deduction for 2021-2022
  • Businesses can deduct 100% of food and beverage expenses for two years (2021–2022), including delivery and restaurant meals related to business.
  • Quote:
    • “For the next two years...Congress has enacted 100% deduction for business meals for food and drink. And this applies to delivery meals as well as meals eaten in a restaurant.” — Laura Saunders [08:02]
  • Background: This deduction has fluctuated in previous decades; the current policy is the most generous in years.

8. Tax Filing Deadlines

• No Extension Expected for 2021
  • Unlike 2020, the IRS is not expected to delay the April 15th, 2021 tax filing deadline.
  • Quote:
    • “I don’t think anybody expects the tax filing dates to be delayed this year.” — Laura Saunders [08:56]

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Memorable Quotes & Moments

• Stimulus: “No, it is not taxable, period.” — Laura Saunders [01:51]
• Medical Expenses: “Once you get above the threshold, I mean, you can even practically deduct your band aids.” — Laura Saunders [04:36]
• Flexible Accounts: “They should lobby their employer to opt into this.” — Laura Saunders [05:45]
• Charity: “For 2020...applies to both married couples and single filers. However, for 2021...married couples can get up to $600.” — Laura Saunders [06:16]
• Retirement Withdrawals: “Ironically, they did enact this relief for other kinds of disasters...for people affected by Covid...that’s not possible yet.” — Laura Saunders [07:38]
• Business Meals: “This is the most generous we've seen it in quite a while. And it's for two years.” — Laura Saunders [08:29]
• Filing Deadlines: “I just don't think it’ll happen again. But you never know.” — Laura Saunders [08:59]

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Important Segment Timestamps

• Stimulus Payments: [01:43–02:41]
• Unemployment Benefits: [03:10–03:49]
• Medical Expense Deductions: [03:49–04:56]
• Flexible Spending Accounts: [04:56–05:55]
• Charitable Deductions: [05:55–06:48]
• Retirement Withdrawals: [06:48–07:56]
• Business Meal Deduction: [07:56–08:41]
• Tax Deadline Discussion: [08:41–09:06]

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Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Advocacy Group Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your money briefing for Tuesday, January 5th. I'm J.R. whalen for the Wall Street Journal. From stimulus payments to extra unemployment benefits TO allowances for 401k withdrawals, Congress enacted all sorts of measures in 2020 to ease the financial hardship caused by the pandemic. Those changes are likely to affect how you prepare your tax return this year.

[Laura Saunders]

Unemployment benefits are generally taxable. Now, of course, tax rates go down as your income goes down. So you might not have a lot of income to pay taxes on, but these unemployment payments are taxable.

[J.R. Whalen]

Coming up, our tax reporter Laura Saunders will clear up some of the confusion about the tax implications of coronavirus relief benefits. That's after the break. Federal coronavirus relief measures put some much needed cash and people's pockets last year, and they're likely to affect your 2020 tax returns and even in the years to come. Our tax reporter, Laura Saunders has been going over the numbers and she's here with details. Laura, thanks for being with us and

[Laura Saunders]

thank you for having me.

[J.R. Whalen]

So let's start with the stimulus payments that people got throughout 2020, including the checks that went out just before New Year's Eve. Is any of that money taxable?

[Laura Saunders]

No, it is not taxable, period.

[J.R. Whalen]

Okay, so people will not get any sort of a letter or a year end statement from Uncle Sam?

[Laura Saunders]

No, people won't be getting a letter from Uncle Sam about this.

[J.R. Whalen]

All right, but there's also a wrinkle in the rules here about stimulus payments and withdrawing money from an ira. It could actually make somebody eligible for stimulus money, even if they weren't last year.

[Laura Saunders]

During 2020, Congress suspended mandatory IRA distributions for retirees. You know, you usually have to take a certain amount every year if you're over a certain age, which is now 72. Now, those were suspended for last year and a lot of people didn't take them. And that meant that that their income, which was high in 2019, dropped significantly in 2020. And they will now find that they qualify for the stimulus payments when they file their taxes. So that's an Interesting wrinkle to keep in mind.

[J.R. Whalen]

Will people get any sort of an alert that they now qualify for stimulus money?

[Laura Saunders]

I don't think that people will get like a direct alert from the government, but I do think that checking to see if you qualify for the stimulus payments will be part of doing your 2020 taxes. Whether you're doing the by yourself on paper or whether you give them to a tax preparer or whether you're using tax software package. I believe this has all been integrated into the systems.

[J.R. Whalen]

All right, now let's move on to unemployment benefits. Another piece of the coronavirus relief during 2020. How will people have to account for those?

[Laura Saunders]

The government's going to give you some help with this. Now, unemployment benefits are generally taxable. Now, of course, tax rates go down as your income goes down, so you might not have a lot of income to pay taxes on. But these unemployment, unemployment payments are taxable and the people who got them can expect to receive a form 1099 G from the payer. That is the state government telling the IRS what unemployment pay they got last year. So they should be on the alert for that.

[J.R. Whalen]

So late in 2020, the government made changes to how people can deduct medical expenses. How will that affect people when they do their taxes?

[Laura Saunders]

The medical expense deduction threshold has bounced all around in the last few years or threatened to bounce around from.5% to 10%. What that is, is you can't deduct medical expenses unless they're over that amount of your income. And Congress finally made a permanent provision that the threshold is 7.5%, which is better for people than 10%. Now, does this matter to a lot of filers? No, because they don't have unreimbursed medical expenses above 7.5% of their income. But it's a very important thing for people who have very high expenses, particularly say someone who's in a nursing home, because those are deductible costs. The definition of medical expenses is much, much broader for tax purposes than it is for insurance companies. So once you get above the threshold, I mean, you can even practically deduct your band aids. It's a good thing for people to know.

[J.R. Whalen]

You know, a lot of people were confined to their homes last year, and so they wound up not using all the funds in their flexible spending account. What happens to any unused money?

[Laura Saunders]

This is another piece of good news. With the recent legislation, the IRS had limited ability to provide relief. But Congress, in this most recent bill passed right at the end of December, gave companies leeway to let people carry over amounts for medical flexible spending accounts and dependent care. Dependent care is often used for things like summer camp and stuff like that. And people didn't wind up using them because the camps were canceled. So the companies now have the ability to provide relief or loosen the rules. But the companies have to opt into what Congress did. It's not just there to be used. So they should lobby their employer to opt into this.

[J.R. Whalen]

Okay, let's go to charitable donations. What changes did Congress make to how much can be deducted for those?

[Laura Saunders]

That was another really confusing thing. Last year. They said that people who don't itemize deductions on Schedule A, and that's most. That's 90% of taxpayers, don't use mortgage interest deductions and things like that on their tax returns on Schedule A. Anyway, Congress said that people who don't itemize on Schedule A can take a deduction for $300. And that for 2020 applies to both married couples and single filers. However, for 2021, the year we're going into, singles get a $300 deduction and married couples can get up to $600. So that's a little bit more generous.

[J.R. Whalen]

Okay. Now, Congress also relaxed the limits on how much people affected by Covid could withdraw from their IRAs and their 401ks. Any changes to that?

[Laura Saunders]

What happened here is really important for people to understand. Last year, because of COVID Congress allowed people to take out up to 100,000 DOL retirement plans like IRAs or 401ks, and then they get three years to either pay it back or have it be taxed. And they don't owe a 10% penalty if they're under 59 and a half. Now, that's really important. The odd thing is that Congress has not extended this relief into 2021. So if your Covid crisis is in the future, you can't get at the 401 IRA money the way you could last year. Ironically, they did enact this relief for other kinds of disasters. Hurricanes, fires, you know, forest fires, things like that. And so that is available if you live in a disaster area that's declared as a major disaster. But for people affected by Covid that want to take out retirement plan withdrawals for 2021, that's not possible yet. Congress would have to act again. Maybe they will.

[J.R. Whalen]

Late last month, Congress also made some changes that give some businesses a break regarding food and beverage expenses. Right.

[Laura Saunders]

That was one of the surprises of this legislation. Now, for the next two years, that's 2021 and 2022. Congress has enacted 100% deduction for business meals for food and drink. And this applies to delivery meals as well as meals eaten in a restaurant. This is, if you're using it, the meal is a way to get more business. So that's a good thing to know about.

[J.R. Whalen]

But hadn't that deduction been around for years before?

[Laura Saunders]

Yes, it has bounced all around over the last decades. There was a famous thing about the three martini lunch in the 70s and 80s, but this is the most generous we've seen it in quite a while. And it's for two years.

[J.R. Whalen]

Okay. So finally, last year the IRS extended the deadline for individuals filing their taxes and to July 15th. But, you know, a lot of people are still in very rough shape financially. Have you heard any talk of tax filing dates being delayed this year?

[Laura Saunders]

I don't think anybody expects the tax filing dates to be delayed this year. I mean, it was an extraordinary thing last year and I just don't think it'll happen again. But you never know.

[J.R. Whalen]

All right. That's Wall Street Journal tax reporter Laura Saunders. Laura, thanks for coming on the show.

[Laura Saunders]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. Hi, I'm J.R. whelan for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me. But who cares? Big retailers are making record profits. That's why we support the Durban Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Advocacy Group Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.