In early 2020, COVID-19 swept the globe, leaving millions of people out of work, including 20.6 million jobs in the United States. The stock market has hit all-time lows, and the country is preparing for an economic recession that experts have warned might be akin to the Great Depression. Taxpayers should be aware of how COIVD-19 will impact their finances for next year’s taxes.
If you have investments, you may see a reduction in your 2020 taxable income, given that you sell the investments on which you have paper losses.
A fluctuation of the market in and of itself does not affect your taxable income; you must realize the losses by selling those underwater investments. Keep in mind that in order for these losses to reduce your 2021 tax bill, you must realize the losses during the 2020 year.
In most cases, retirement accounts of most Americans will be unaffected by COVID-19. A traditional IRA or 401(k) is funded by pre-tax income, which the government considers ‘paper’ income. However, those with a Roth IRA could see an impact on their taxes. If the value of your Roth IRA takes a hit, that loss could be claimed on your taxes.
Will the Market Ever Recover?
So far, in the history of the stock market, the market has always made recoveries, even from its lowest lows. The global supply chain will, as one would imagine, continue and people will continue to need goods and services. Although the ‘new normal’ may cause a permanent shift in some industries, supply and demand will not cease to exist. We can all look forward to a time when the market recovers and soars higher than ever before.
Do I Need a Professional to Prepare My Taxes?
In response to COVID-19, many Americans are choosing to have their taxes professionally prepared to ensure that they are receiving every deduction in which they are entitled to, increasing the amount of their refund (or reducing their tax bill).
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