It’s March, which means tax season is in full swing. Filing your 2020 taxes could get complicated (what else is new about 2020?) 

Virtually no one was untouched by major financial changes caused by the COVID-19 pandemic. Stay-at-home orders forced businesses to close, leading to layoffs and the largest number of unemployed Americans ever recorded. 

The prospect of a tax return usually makes millennials excited about this time of year, but financial changes has some anxious about how big of a bite Uncle Sam may take this year. 

So we asked you what questions you have about this year’s federal taxes and asked some tax experts for the answers.

Will my unemployment be taxed?

Federally, yes, unemployment will be taxed. If your state does not have income tax, unemployment will not be taxed. However, some states, including Alabama, have chosen not to tax unemployment income. 

Alabama will not tax unemployment. Southern states that do not tax income, including Florida and Tennessee, also will not tax unemployment. If you’re not sure if your state plans to tax unemployment, check with your state unemployment office. 

Yes, having to pay taxes on unemployment benefits seems scary, especially since unemployment got a nice boost thanks to the CARES Act. However, it might not hurt as bad as you think.

Most of our clients are still seeing refunds, even if they drew unemployment,” said Nathan Rigney, principal tax research analyst at The Tax Institute at H&R Block. “Even if you chose no withholding on your unemployment, you may have enough withheld to cover that either through withholding from a W-2 job you for part of the year.” 

A bill to make the first $10,200 of unemployment benefits received nontaxable was presented in February to the house by U.S. Sen. Dick Durbin, D-Ill., and U.S. Rep. Cindy Axne, D-Iowa. The bill, named the Coronavirus Unemployment Benefits Tax Relief Act is intended to stave off tax surprises for millions who lost their jobs and received unemployment benefits last year. 

Twelve legislators who signed on to the bill signed a letter last week urging the House to add the bill to the American Rescue Plan, the latest coronavirus relief package. The letter points to Treasury Department data that shows 40 percent of Americans didn’t know unemployment counted as taxable income. 

“Without tax relief for these benefits…millions of workers who claimed UI last year may face an unexpected tax bill this spring,” the legislators wrote in the letter. “Workers and families are still struggling with the economic pain caused by COVID-19, and we are pleased the American Rescue Plan extends unemployment benefits for workers and financial support for small businesses. However, impending tax bills on UI benefits take away vital dollars that individuals need to pay for essential expenses like housing, health care, and food.”

The provision wasn’t included by the House. The senate is expected to vote on the bill this week. 

If the provision doesn’t make it into the latest relief package, but is passed later, tax professionals say the IRS will provide a way to amend your return. 

“I don’t to speculate what will happen, but if there is a bill that’s retroactive, you could amend your return. The IRS will come out with a process to help you with that,” Rigney said. 

Are stimulus payments taxable? 

No. Stimulus payments are not taxable as income because, according to the law, that money technically isn’t income, it’s an advance tax credit. The IRS sends out these payments, remember?

My small business got PPP money. Will PPP funds be taxed as income for my business?

No. Paycheck Protection Program funds will not be taxed as income. However, in some cases, forgivable PPP loans could increase a business’s cash basis. 

“That could in theory, harm a business owner, either this year or later on down the road when they’re looking to sell or draw more money out. That’s another issue where the IRS hasn’t issued guidance,” said Brad Garland, 

“I’ve talked to other tax professionals around the country. A lot of us are extending business returns that have this issue. We just don’t know. We can make estimates and we can do drafts, but until we get a concrete answer, we’re waiting.” 

He encouraged business owners to consult with their tax professional about this issue. 

Garland did encourage small business owners to look into the Employee Retention Tax Credit. This refundable tax credit is worth 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

“As long as they used the loan for their expenses to run the business, those funds are not claimed even though they are technically forgiven loans,” said Lisa Greene-Lewis, CPA and tax expert at TurboTax. 

Although businesses can’t technically use the Employee Retention Tax Credit on wages paid with Paycheck Protection Program funds, they may be able to use the tax credit for wages not paid through PPP funds. 

“If you’re a restaurant and you have employees, and you only got $20,000 in PPP, you definitely have leftover wages that you can tack on to the employee retention credit. But employers need to be aware of that,” Garland said. 

My income changed in 2020, and now I’m eligible for the next round of stimulus payments. Should I go ahead and file my taxes? 

Yes. If your income changed in 2020, making you eligible for stimulus payments, you should file immediately.

People whose change in income in 2020 made them eligible for stimulus payments are eligible to receive the previous $600 and $1200 stimulus payments as part of their tax return through the Recovery Rebate Credit. 

“This is for people that never got the check card, or it got lost, you know, whatever happened with their payment. If they didn’t get that funding, they can get it now,” Garland said. 

People who had a baby in 2020 are also eligible for the child stimulus payments distributed in the first two rounds. Under the proposed American Rescue Plan, the child tax credit is increased to $3,000 per child ($3,600 per children under 6).  

This year, you can use your 2019 income for the Earned Income Tax Credit if your 2019 income makes you eligible for more credits.

If your income increased in 2020, and now your income is above the proposed $75,000 per year threshold for stimulus payments, maybe hold off on filing until after the third round of stimulus payments are sent out, Garland said. 

Things to keep in mind

All this information about what tax benefits you or your business may be eligible for can feel overwhelming. The prospect of having to pay taxes for maybe the first time also sounds like the icing on the cake for 2020.

While all this information can feel overwhelming, Greene-Lewis said to keep in mind that taxpayers have more opportunities to take advantage of existing tax credits and some new tax credits.

I know there were a lot of events that occurred, but there is a lot of relief available for taxpayers. Keep that relief in mind,” she said.