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As many of us hunker down for the ensuing arctic freeze, let’s talk taxes. Last year brought plenty of legislative changes. Let's touch on a few topics.
IRS Begins Accepting Returns on February 12
This is a bit later than normal. The Service is still trying to catch its breath like the rest of us including making final revisions due to some of the year end changes. We're expecting a bit of a bumpy filing season. IRS's offices and phone lines are still not fully staffed because of coronavirus restrictions. Furthermore, the IRS is still processing millions of 2019 tax returns. Finally, there's discussion of passing more stimulus. If this happens in the next couple of months, this duty could fall on the IRS's plate during tax filing season. While some want the April 15 deadline pushed out again as it did last year, others don't and it's too early to tell if there will be an automatic extension.
Charitable Cash Contributions
New this year, you may deduct up to $300 per tax return of charitable cash contributions to eligible charities. This $300 is per return and doesn't increase or decrease depending on filings status such as single, married, head of household. Typically, taxpayers must itemize their deductions to be eligible to receive a benefit for charitable contributions. With the passage of the Tax Cuts and Jobs Act of 2017, more people are taking the standard deduction and therefore receive no tax benefit for charitable deductions. This $300 deduction changes that at least slightly. It does need to have been a cash contribution, including debit card, credit card, or electronic payment, so donations of household goods or clothing items do not count. This has been extended into 2021.
Stimulus Payments and the Recovery Rebate Credit
Stimulus payments are not taxable. Technically, they're an advance payment of a refundable credit that is claimed on your 2020 individual income tax return when filed in 2021.
If you received a stimulus payment based on 2019's information but later became ineligible in 2020, such as due to an increased income, you do not have to pay the funds back. The primary caveat to this is if a person became deceased prior to receiving the stimulus payment, in which case, the decedent's portion of the funds do need to be returned.
If you didn't receive a stimulus payment but are eligible, you will get the payment as the Recovery Rebate Credit when you file your 2020 tax return. This will increase your overall refund (or reduce the amount you owe).
In the case you increased the number of eligible dependents such as through birth or adoption, you'll receive the additional amounts as part of the Recovery Rebate Credit.
Note that if you received a stimulus payment but then attempt to claim the Recovery Rebate Credit on your 2020 tax return, the IRS will flag your return which will delay your potential refund and may open your return up for further investigation. While stimulus recipients were supposed to keep the letter that was sent with the 2020 payment, a letter wasn't sent with the January 2021 payment, though Service says they're working on it. You can always check your bank records or more officially, the IRS's website to confirm (www.IRS.gov/account).
Big picture: if you got it, you generally get to keep it and if you didn't get it but should have then you'll get it when you file 2020's taxes.
Unemployment Benefits and Qualified Sick and Family Leave Benefits Are Taxable
According to a January 12, 2021 report put out by the Congressional Research Service, unemployment peaked in April 2020 at 14.8%, affecting millions. Many people have had to file for unemployment for the first time in their lives. Others have had to help care for loved ones and may have received qualified sick and/or family leave benefits.
Qualified sick or family leave benefits are included in an employee's W-2 and are considered taxable compensation. Qualified leave wages are not distinguished from other wages an employee may receive. These wages are subject to federal income tax and the employee's share of social security and Medicare taxes; they're also considered wages for purposes of other benefits such as 401(k) contributions. While this isn't likely a huge surprise to many since it looks and feels like any other paycheck, it's a good reminder, nonetheless.
Unemployment compensation, on the other hand, tends to surprise folks when they learn the unemployment benefits are taxable. Recipients may elect to have federal and state taxes (if applicable) withheld from their benefits, which is a good idea to help reduce the tax bite when filing.
Unemployment benefits are reported on Form 1099-G so if you received those benefits, be on the lookout for that form. Many states allow you to download it directly online. Additionally, unemployment benefits have been the subject of widespread fraud. If you received a Form 1099-G for unemployment benefits but did not actually receive those benefits, reach out to the state unemployment agency to explain the situation.
Coronavirus-related 401(k) or IRA Distributions
This is another area where I've received some questions. Coronavirus-related 401(k) or IRA distributions have some tax advantages but they're not tax-free. The 10% early withdrawal penalty portion is waived; that's the good news. However, regular income tax is still due on the distribution. The taxpayer can pay the tax over three years. If the funds are put back into the 401(k) or IRA account within three years, those funds are treated as a rollover and are not subject to tax. If you're one that took the money out "just in case" and later decided you didn't need it, you can still put it back into your retirement account - no harm, no foul.
Paycheck Protection Program (PPP)
We got a lot of loose ends tied up at the end of 2020 regarding PPP. PPP forgiveness isn't taxable and the allocated expenses are now deductible. This is what we expected but it took a literal act of Congress to make happen. Additionally, the SBA recently released a revised Form 3508S which is a simplified forgiveness application for those with loans under $150,000. Answer a few questions such as number of employees retained due to the loan, the estimated amount spent on payroll, the total loan value, and signature certifying compliance with the program. No documentation is required to be sent. Of course, you'll want to keep your own just in case.
PPP 2.0 was also approved. This time with a few more stipulations. The primary "gotcha" is that the borrower must have had a top line revenue reduction of at least 25% in any calendar quarter in 2020 compared to the same calendar quarter in 2019 (e.g. 2020 Q3 vs 2019 Q3). Additionally, the rules state that PPP 1.0 funds need to have been spent, not necessarily forgiven, but the lenders haven't been consistent on that. Furthermore, some lenders are requiring borrowers to have used them for PPP 1.0 to be eligible for PPP 2.0.
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