Read These Tips on Maximizing Your Tax Credits for 2020 Today

• Author: Jeffrey Simmons
• Posted: 2024-05-12

While available tax credits haven't changed much from the 2019 tax year to the 2020 tax year, many people have seen their income significantly interrupted by the coronavirus. Many people saw periods of unemployment, many people received stimulus money, and it can be very confusing to navigate what tax benefits might be available to you.

Of course, the IRS isn't going to make it easy on you to save the most money on your taxes. Please note that this article is solely about federal income tax credits. If you're in a state with income tax, there are likely similar credits available that you can claim.

Taxes on Your Stimulus Check

If you received a stimulus check in 2020, you should know that the income from that is not considered taxable. The IRS actually deems it an "advance on a refundable tax credit." In other words, the money was sent out as though you got a tax credit for that amount. Since it's not considered "income" legally, your state cannot tax it and the federal government cannot tax it.

What About Taxes on Unemployment Money?

While your stimulus check cannot be taxed, all money received due to periods of underemployment and unemployment can be taxed. For a period of time, the federal government offered a supplement of $600 per week to those affected by unemployment. Assuming you're in the 10% tax bracket, this means that you would owe precisely $60 of that money back to the federal government in income tax.

Additionally, money you receive from your state's standard unemployment payments is federally taxable at the same rate. This is one of the most common errors that leads to a surprise tax bill at the end of the year. Luckily, there are still things you can do with tax credits to lessen the burden, as we'll discuss below!

Earned vs. Unearned Income

The IRS places a huge distinction between "earned income" and "unearned income". If income is considered "earned," then FICA taxes that cover Social Security and Medicaid must be paid on it in addition to standard federal income tax. This is money from a job in most cases.

Money from other sources, such as unemployment, is considered unearned income. This means that, while you can be taxed at the standard federal income tax rate, you do not have to pay FICA taxes on this money. Other examples of unearned income would be lawful gambling winnings and an inheritance.

For Those With Earned Income

If you have earned income, you have a bit more flexibility. First, there's the possibility of receiving the "Earned Income Tax Credit". This is designed for lower-income families and people who have earned at least some income. It can be up to around a $600 refundable federal tax credit!

If you have spare earned income, you can avoid paying taxes on it this year by shelving it away in a retirement account. Remember, Roth IRAs are post-tax, but standard IRAs and 401(k)s are pre-tax!

For Those With Unearned Income

If most of your income is from unemployment and similar sources, you have slightly less options. What many people don't know is that people with only unearned income can still receive what's known as "The Saver's Credit".

While a 401(k) and standard and Roth IRAs can only receive earned income, there is one type of savings account that is post-tax but also allows people to save money and literally get paid for it! This is known as an ABLE account. You must have a disability to qualify, but the list of qualifying disabilities is so immense that most Americans do qualify.

You can deposit any amount of unearned income up to $15,000 per calendar year into an ABLE account. The most money that The Saver's Credit can yield a single person is a $1,000 non-refundable federal tax credit. The exact amounts it yields are dependent on your family size and your exact income for the year.

But Wait, There's More!

IRS.gov is an excellent source to read more about tax credits for which you may be eligible. While it isn't exactly weekend reading material, it can end up saving you thousands of dollars, often by just saving money in a slightly different way or following a slightly different process than you already do!