We have new, unproven and unexplained tax law. We have misunderstood econ stim payments. More people on Unemployment Insurance than maybe ever. And the IRS STILL hasn’t even lodged all of the 2019 tax returns yet. (Let alone recorded your payments)
What on earth is the 2021 tax season going to be like?
It’s going to be hard.
Here are some of the things to watch:
If you received the first stimulus payment from the March CARES Act or the second stimulus payment from the December stimulus bill, there will be no tax due from the payments. They also don’t count as income for determining whether you’re eligible for government assistance or benefit payments.
If and you were eligible but didn’t receive the payments, you can claim the missing payments as a Recovery Rebate Credit on your 2020 tax return. It will either increase the size of your total tax refund or lower the amount of taxes you owe.
If you don’t usually file tax returns because you are under the income threshold, but are owed the stimulus payment, you will need to file a 2020 return. It doesn’t mean you’ll pay tax. It’s just what you need to do in order to collect the stimulus payments.
For 2020, the standard deduction for single filers is $12,400 and $24,800 for married filing jointly. It’s $18,650 for head of household.
Charitable donations can still be deducted as itemized deductions, as in the post. In addition, though, you can also deduct up to $300 in donations even if you don’t itemize.
Employers can contribute up to $5,250 toward an employee’s student loan debt. It will be a deduction for the employer and tax free for the employee. The payment must go against the principal amount of the debt and have been made between March 27, 2020 and December 31, 2020.
Retirement Plan Changes
The CARES Act waived required minimum distributions from IRAs and retirement plans for 2020.
Also, under the CARES Act, early withdrawals taken in 2020 due to COVID-19 hardships will not be subject to the 10% early withdrawal penalty, if certain conditions are made.
In order to avoid the 10% penalty, the distributions must have been made to a qualified individual from an eligible retirement plan between Jan. 1, 2020, and Dec. 31, 2020, and must be $100,000 or less in aggregate.
A qualified individual is anyone who has been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or has experienced adverse financial consequences due to being quarantined, furloughed, or laid off; having work hours or pay reduced; having been unable to work due to a lack of child care; having owned or operated a business that has been closed; having had a reduction in self-employment income; or having had a job offer rescinded or a start date delayed. An individual also qualifies if his or her spouse or a member of his or her direct household has experienced any of the above.
Additionally, a qualified individual is not required to demonstrate a true need for the funds in order to take advantage of this provision. As long as an individual has experienced adverse financial consequences for any of the reasons above, an early distribution is allowed.
Earned Income Tax Credit
The earned income tax credit is a refundable tax credit (meaning you can get back more than you paid in for taxes). It is designed to benefit people with lower incomes. However, you must have some earned income in order to qualify.
As part of the CoronaTax bills in 2020, you can use either your 2019 or 2020 earned income to calculate your earned income tax credit amount for your 2020 tax return.
Child Tax Credit
The child tax credit allows you to claim up to $2,000 per child. Some of that will also be refundable. Like the earned income tax credit, it is designed to help lower income working families. And, as before, you can use your 2019 earnings or your 2020 earnings to determine your eligibility for this credit.
Health Flexible Spending
The limit for tax-free contributions has been increased to $2,750 for 2020.
Qualified medical expenses over the amount of 7.5% of adjusted gross income are deductible as itemized deductions. The threshold was lowered to 7.5% from 10.0%.
Work From Home Expenses for Employees
If you work from home as an employee you cannot take a deduction for your home office. However, if you have a business or are self-employed, you can take that deduction.
(Another reason to start a business today!)
What Do CPAs Think About the 2021 Tax Season?
A recent survey by one of our professional CPA groups asked what we thought about the 2021 tax season that is just beginning.
Here are the results:
73% expect the biggest challenge for tax preparers will be lack of guidance from the IRS
66% expect the biggest challenge for taxpayers will be understanding the tax impacts of COVID-19 including taxable unemployment payments, economic stimulus payments, COVID distributions and the earned income tax credits.
Hang on, it’s going to be a bumpy ride!