How COVID-19 Affects Filing Taxes In 2021?
The majority of Americans are baffled by the 2021 tax filing. The tax codes have changed as a result of the pandemic crisis. There are so many changes that it’s difficult to keep track of them all. However, a basic understanding of these changes is essential to comprehend how COVID-19 may influence tax filing in 2021.
The tax filing for 2021 is influenced by a number of things. The post-covid tax situation is influenced by government relief, unemployment, people working from home, freelance income, and so many other factors. As a result, there is some unanticipated taxation along with some unexpected benefits.
The IRS has spent multiple pages on its website describing the recent changes to tax policies. We dug through the heavy language and constructed a simple summary and explanation.
Why Is The Pandemic Changing Tax Filing In 2021?
The pandemic changed the regular course of events. Everything was unprecedented, from the continual fear of the virus to the lockdown and isolation. As a result, it took a big toll on finance and the economy. Consequently, it changed the filing of taxes in 2021 as well.
Government Reliefs
The covid pandemic was a serious blow to the economy. To manage the shock, the government took some initiatives.
They distributed relief payments to millions of people across the United States. This is a rare occurrence. As a result, it will undoubtedly have an impact on taxation.
A Shift In The Work Economy
Significant development occurred in the workplace. Many companies have reduced their staff as a result of the lockout and business losses. Salary reductions were made by certain companies. Meanwhile, several employees quit their employment on their own because they were afraid of contracting the virus.
A substantial number of people have recently lost their jobs. In addition, the gig economy is attracting a big number of new freelancers. To deal with the shift, new taxation regulations on unemployment benefits and gig labor revenue have been implemented. These new tax codes seem to have a substantial impact on tax filings in 2021.
The Misery Of Small Business
The pandemic wreaked havoc on small enterprises. They had to suffer major losses as a result of long lockdown and social distancing measures. By providing loans, the government supported the enterprises to survive. And, that’s how small business owners have been paying their employees, rent, and other expenses.
Considering the situation and the misfortune of small business owners, the government has designed its tax policies accordingly. This will have a profound effect on the filing of taxes in 2021.
People Spending Retirement Funds
The pandemic has forced many people to take out money from their retirement funds. This is not a common occurrence, and it will have a significant impact on taxes as well.
The Effects Of COVID-19 On 2021 Tax Filing
The COVID-19 scenario resulted in stimulus payments, additional unemployment benefits, a shift to the home office, and other economic changes. A discussion of these topics will aid us in determining how COVID-19 affects tax filing in 2021.
Stimulus Checks
The government’s stimulus checks are not subject to taxation. However, if you have been underpaid, you can claim a refund on your tax returns.
All you have to do now is complete the paperwork correctly. To do so, you must first understand the stimulus check situation.
According to the new tax relief bill, you won’t have to pay any taxes on the first $10,000 in unemployment benefits you receive from the government. Your income must be less than $150,000 in this circumstance. Keep in mind that this applies only to the recent pandemic situation.
Eligible Adults
Individuals with an adjusted gross income of up to $75,000 were considered eligible adults. If the person filed as a single parent, their income had to be at least 112,500 dollars.
Married couples have to have a combined income of up to $150,000 to be eligible for the payment. People with higher incomes received less, or even nothing at all.
Meaning Of Relief Payments In The Tax Filing
If you receive a government check, you must report it on your tax return. Taxes, on the other hand, are not applied to the payment. Z
If you were underpaid, you can claim the payment on your tax return. For that, you need to submit notices 1444 and 1444-B to show the details of payment. A faster way to receive the money is by filing an electronic tax return. The money will be directly deposited into your account.
Unemployment Benefits
If you are currently unemployed and rely on government assistance, you must pay taxes on that money. This is the usual rule when it comes to unemployment compensation. However, some states have slight differences.
The person who has been receiving benefits gets a 1099-G document from the state. The form details how much money you received from the government and what percentage of it was held back as taxes.
Unemployment Taxation In The New Relief Bill
According to the new relief bill, you don’t have to pay any tax on the first 10,200 dollars you receive from the government as unemployment benefits.
In this case, your income has to be less than 150,000 dollars. Keep in mind that this applies only to the recent pandemic situation.
Sticker Shock
The unemployment benefits are not like the usual paychecks from a typical employer. In normal paychecks, the tax money is already withheld. This is not the case with unemployment benefits. The tax money is not automatically held back in unemployment benefits.
The problem is that many newly unemployed people who received these checks didn’t know about this not-holding-back. As a result, this might come off as a big surprise when their 1099-G form arrives.
Unemployment Fraud
There were numerous examples of unemployment fraud in the first year of the pandemic. It’s possible that you didn’t take a single penny from your unemployment benefits. Regardless, the state will send you a form with a detailed explanation of your income to your address.
This indicates that you have been scammed. Under your name, someone else picked up the checks. If this happens to you, the Internal Revenue Service recommends contacting your state agency to seek help to correct the 1099-G form.
However, you might not even know that you have been a victim of fraud before already filing your taxes. Because scam artists are too clever. They will have the 1099-G form delivered to a different address so that you don’t get any clue.
Paycheck Protection Program
The American government took many initiatives to save small businesses and their employees during the pandemic period. The Paycheck Protection Program is one of the most important ones. The CARES act established this loan program.
A Loan Program To Save Small Businesses
The Paycheck Protection Program, or PPP, is a 953 billion dollar business loan program. The purpose of the program was to help small businesses to keep on paying their workers and rents through the corona period.
The money received from the program was 2.5 times equal to the applicant’s typical payroll expenses per month. This is a low-interest private loan. The applicant will use the money to keep sending its workers their monthly paychecks and cover rent and utilities.
PPP Loans In Relief Bill
The recent relief bill from Congress made the tax stance on PPP loans very clear. The recipient of the loan will not have to pay any tax on the money they spend on paying their workers and rent. However, they will have to report detailed documentation of their expenses.
This is great news for PPP loan recipients. To cut down on your taxes, start tracking everything you spend from PPP loans on business-related taxes. The more details you can present, the greater your gains will be.
Withdrawals From Retirement Funds
Many people had to withdraw money from their retirement funds during the pandemic to maintain their households. These withdrawals are subject to taxes. This might come as a shock to many people who had never before dipped into their retirement savings.
The good news is you will get three years to file these taxes on your withdrawals. So, it’s best to conjure up a plan with help from a professional service.
Work From Home
During the pandemic, the home office was the new way of working. Due to social distancing measures, most companies have their employees do their daily office work from home. However, since the last overhaul, employees can no longer claim any tax deduction on their home-office income.
To claim a tax deduction on your home-office income, you have to be self-employed and your home-office must be strictly your regular and principal place of business. People who temporarily shifted to working from home due to pandemic reasons do not fall under this.
Earned Income Tax Credits And Child Tax Credits
To help low and moderate-income households, Congress took a ‘lookback’ policy for the time being.
This allows taxpayers to choose between two incomes (2019 or 2020) to claim Earned Income Tax Credits and Child Tax Credits. Lesser income will yield greater credits. So, the taxpayer can choose the income which gives the most benefits.
Final Thoughts
Well, sorting through all of this is a lot of work. Moreover, it is confusing and hard. So, feel free to call our experts and get a free consultation. From there, we can work together to put a plan in place.
When you understand how COVID-19 affects filing taxes in 2021, the puzzling post-pandemic tax situation hopefully becomes a lot clearer to you. I wish you luck on your 2021 tax filings.
