Tax Season is Here

//Tax Season is Here

Tax Season is Here

As much as we prefer to leave the dumpster fire that was 2020 behind us, we are not done with it yet.  Tax season is upon us, and there are steps we can take to facilitate a better experience. The passage of the CARES Act in March 2020, and the coronavirus relief package passed as part of the Consolidated Appropriations Act 2021 in late December, provide unique features of which tax filers can take advantage.

Economic impact payments

As part of the coronavirus relief packages passed in 2020, the Treasury Department sent two rounds of economic impact payments to individuals.   Technically, these payments were advanced tax credits to individuals.  If your adjusted gross income for 2018 and 2019 was below a certain threshold that allowed you to claim certain tax credits, the IRS assumed you would be in the same position in 2020 and put the cash value of those credits in your pocket early.

Some eligible individuals didn’t receive these payments, and the IRS has updated Form 1040 to account for them.  For instance, if you received a partial or no payment because your AGI was too high in 2018 and 2019, you may claim an additional credit if you had a lower AGI in 2020 that would make you eligible.  These will come in the form of a credit on the tax return.  Also notable, the only adjustments recognized will be those made in the taxpayers’ favor.  So taxpayers will not see any tax liability increase related to the payments because payments are technically tax credits and not taxable income.

Unemployment insurance benefits

Most people forget that unemployment benefits are generally subject to federal taxes.  Taxpayers who received benefit payments should have withheld the appropriate taxes.  Many likely have not withheld enough, which will create a tax liability when they file their 2020 taxes.

Both relief packages included an increase in unemployment insurance benefits.  The CARES Act directed an additional $600 per week from March 28th to July 30th and then $300 per week additional through December.  The Act extended the duration of benefits (13 weeks) after state benefits expired and expanded the number of eligible individuals.  Collectively this drove an increase in unemployment benefits by 10x, from $6.4 billion to $64.2 billion in the second quarter of 2020.

Changes to other credits

The most recent coronavirus relief package adjusted the calculations for the Earned Income Tax and Child Tax Credits in 2020.  Both credit calculations are based on earned income.  A phase-in mechanism refers to a minimum level of earned income to take maximum advantage of the credits.  Many individuals who found themselves out of work during 2020 may be looking at reporting income levels that earn lower credits.  In response, the latest relief package attempts to address this issue by allowing tax filers to substitute 2019 earnings instead of the 2020 earnings to determine the credit.

*Disclosure: This is for informational purposes only.  Please consult your tax advisor for more details on the items mentioned above.

Disclosure: https://mitchcap.com/disclosure/

2021-03-05T10:37:33-06:00 March 5th, 2021|Financial Planning|0 Comments

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