Because of the COVID-19 pandemic, the government has made several laws and adjustments to the IRS code. This helps American taxpayers who were adversely affected by the COVID-19 pandemic. It’s a good idea to understand the efforts of the government to provide taxpayers with tax relief.
If you are filing your taxes this year, you need to know about the COVID-19 tax changes. Understanding some of the basics will help you best understand what applies to you. It is advised that you seek the advice of a tax professional when preparing your tax return this year.
2020 Stimulus Checks
The stimulus checks are the economic impact payments the government issued to taxpayers. This was due to the 2020 Coronavirus that affected most Americans financially.
Some people did not receive their payments because they had past-due tax returns that needed to be filed from prior years.
If you have not filed your 2018 tax return, you should get that filed as soon as possible. This will help the government determine your correct address and payment amount based on the number of dependents you have.
Payments were sent in 2020, and taxpayers do not need to offset their taxes with the amount they received from their stimulus checks. The only exception is past due child support.
For more information on the Economic Impact Payments, check out the IRS’s page on Economic Impact Payments.
Families First Coronavirus Response Act (FFCRA)
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide their employees with paid sick leave or expanded family and medical leave as it relates to COVID-19, according to the U.S. Department of Labor. The Wage and Hour Division of the Department of Labor (WHD) enforces this law and applies it through March 31, 2021.
Self-employed taxpayers are able to get a refundable tax credit on IRS Form 1040 if they qualified for an employer credit or if the taxpayer was unable to work between 4/1/2020 and 3/31/2021.
The Families First Coronavirus Response Act applies to the following:
- The Payroll Tax Credit for Required Paid Sick Leave
- The Payroll Tax Credit for Required Paid Family Leave
- Credit for Sick Leave for Self-Employed Individuals
- Credit for Family Leave for Self-Employed Individuals
Coronavirus-Related Retirement Account Distributions
The retirement account distributions apply during the months of 1/1/2020 and 12/30/2020. The amount allowable is up to $100,000 and is made to an individual who was diagnosed with COVID-19, who has a spouse and/or dependent who was diagnosed with COVID-19, or who experienced adverse financial consequences due to COVID-19.
To meet the last qualification, the taxpayer, spouse, or member of the taxpayer’s household must have experienced adverse financial consequences due to a reduction of pay or self-employment income due to COVID-19, have had a job offer rescinded or start date delayed due to being quarantined, laid-off, furloughed, or receiving reduced hours due to COVID-19, or owned or operated a business that closed or reduced hours due to the virus.
The Coronavirus-Related Retirement Account Distributions offers three tax benefits.
- The first is a no early withdrawal penalty for up to 10%.
- The second is a default three-year income spread with the election to include one’s income from the tax year 2020.
- The third is a three-year repayment option offered with no tax or penalty.
For that last benefit, if the funds are not repaid to the retirement account by the date of the timely filing of the taxpayer’s tax return, the taxpayer must include one-third of the distribution as part of his or her taxable income with no 10% penalty for tax years 2020, 2021, and 2022, or the taxpayer must include 100% of the retirement account distribution as part of his or her taxable income in the tax year 2020.
Also, for that last benefit, if the taxpayer repays the distribution before filing his or her 2020 tax return, the taxpayer does not need to include any of the retirement distribution as part of his or her taxable income in the tax year 2020.
If the taxpayer elects to include all of the distribution as part of his or her taxable income in the tax year 2020 but repays the full amount of the distribution after filing his or her 2020 tax return but before 8/16/2023, the taxpayer may amend his or her 2020, 2021, and 2022 tax returns to remove the income and claim refunds of the taxes paid.
For the 2020 tax year, individual taxpayers are allowed an adjustment to the income for certain cash charitable contributions made during the 2020 tax year. This limit is a maximum deduction of $300, provided the taxpayer does not itemize deductions. If the taxpayer is married filing a separate tax return, they can only deduct a maximum of $150 each.
For taxpayers who do itemize their tax deductions, the charitable deduction allows taxpayers to claim up to 100% of their adjusted gross income (AGI). This only applies to the 2020 tax year.
Student Loan Payments
The CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) was signed into law in March 2020. This law permits employers to help their employees by providing tax-exempt student loan repayment contributions or tuition assistance. This law was extended through December 31, 2025.
Employees can exclude payments of up to $5,250 from their gross income if paid from an employer to an employee for tuition assistance or if paid to the employee’s qualified educational loan lender in order to pay the principal or interest of the student loan.
Employee Retention Credits
The Employee Retention Credits (ERCs) was created to encourage businesses to retain employees. The ERCs were created under the CARES Act and help employees stay on their employers’ payrolls. The refundable tax credit is worth up to 50% of $10,000 in wages paid by an eligible employer whose business was financially affected by the Coronavirus in 2020.
Eligible employers must meet one of two tests with respect to a calendar quarter between 3/13/2020 and 6/30/2021 to get the Employee Retention Credit (ERC). Wages used to qualify for the PPP loan forgiveness are now fully deductible. The loan forgiveness is excluded from tax and is treated as a tax-exempt amount for partnership and S-corporation purposes.
Employment Tax Deferrals
The employment tax deferrals are for employers and those who are self-employed. Deferral does not mean forgiven, so you will have to pay it back at some point in the future. It is advised that you pay the employment taxes, including Social Security and Medicare taxes, to avoid any difficulties regarding repayment of the deferral in the future.
One important thing to note is that 50% of the deferral amount will be due at the end of the 2021 tax year, and the entire balance will be due at the end of the 2022 tax year.
Educator Expenses Deductions
These deductions were previously limited to $250 per year. With the CARES Act, the deductions have been expanded to include the cost of protective equipment, disinfectant, and other supplies used for the prevention of the spread of the COVID-19 virus if paid or incurred after 3/12/2020.
Refundable Tax Credits
When applying for a refundable tax credit, there have been some changes. For the Earned Income Tax Credit and the Additional Child Tax Credit, if the taxpayer’s earned income in 2020 is less than 2019 earned income, the taxpayer can elect to use 2019 earned income amount for the purposes of calculating the tax credit.
Net Operating Losses
The 80% of taxable income limitation does not apply to tax years beginning after 12/31/2017 and before 1/1/2021. This limit does apply to tax years beginning after 12/31/2020 with respect to net operating losses arising in tax years beginning after 2/31/2017 carried to that year.
Taxpayers can now elect to waive the five-year net operating loss carryback by the due date plus the extensions for their tax return for the first year after 3/27/2020 or amend their returns to include net operating losses back to a five-year period of time.
As you can see, there were many changes to the laws and tax code, due to the COVID-19 pandemic. If you are looking to file your taxes this year and one of these items affects you, you would benefit the most from hiring a tax professional to help you complete your tax return. They understand the rules and regulations that apply to American taxpayers.
They know the right tax forms and schedules that you need to complete in order to file your tax return. Some tax professionals can even represent you in the event of an audit. If you anticipate an audit coming your way, it’s a good idea to have a qualified tax consultant by your side, someone who can represent your tax returns on your behalf.
At Borshoff Consulting, we are qualified to do your taxes for you. Not only are we tax experts, but we also can represent you in the event of an audit. Make sure you know the COVID-19 tax changes that will affect you this tax season. Contact us for more information on how you can best use our services to get the most out of your taxes this year.