Don’t get shocked by a high tax bill! Be prepared for these pandemic-related tax surprises when you file your 2020 tax return. Please note: This information may change with ongoing legislation.
- Taxes on unemployment income. If you received unemployment benefits in 2020, you need to report these benefits on your tax return as taxable income. Check to see if either federal or state taxes were withheld from unemployment payments you received. If taxes were not withheld, you may need to write a check to the IRS when you file your tax return.
- Taxes from side jobs. Did you pick up a part-time gig to make ends meet? Payments received for performing these jobs may not have had your taxes withheld. If this is the case, you’ll need to pay your taxes directly to the IRS on April 15.
- Unusual profit-and-loss. If you run a business that was hit by the pandemic, you may find your estimated tax payments were either overpaid or underpaid compared to normal. Now that 2020 is in the books, run a quick projection to ensure you are not surprised with an unexpected tax bill when you file your tax return.
- Underpayment penalty. If you did not have proper tax withholdings from your paycheck or your estimated tax payments weren’t enough, you could be subject to an underpayment penalty. While it’s too late to avoid a penalty on your 2020 tax return, the solution in the future is to make high enough estimated tax payments each quarter in 2021 or have the appropriate amount withheld from your 2021 paychecks.
- A chance to claim missing stimulus payments. (A good surprise!) If any of your stimulus payments were for less than what you should have received, you can get money for the difference as a tax credit when you file your 2020 tax return.
Please use these examples to prepare yourself for a potential tax surprise during the uncertainty caused by the ongoing pandemic.
Individual Rule Changes
Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most important items in the new bill that impact individual taxpayers.
Reduces income tax rates. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
Doubles standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions are suspended, as well as most additional standard deductions (except for the blind and elderly).
Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
- Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
- Caps mortgage interest deductions. Mortgage acquisition indebtedness interest will be deductible for no more than $750,000. Existing homeowners are unaffected by the new cap. The bill also suspends the deductibility of interest on home equity debt.
- Limits theft and casualty losses. These deductions are now only available for federally declared disaster areas.
- Removes 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans now include amounts to pay tuition for students in K-12 private schools.
Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
Because major tax reform like this happens so seldom, it’s worth scheduling a tax planning consultation to ensure you reap the most tax savings possible during 2018.
In an effort to reduce the amount of money paid to identity thieves who file fraudulent returns, the IRS will be implementing changes in the timing and way they handle the processing of tax returns.
These steps will continue to evolve, but recent changes will impact millions who depend on receiving an early refund.
Earlier filing of form W-2s and 1099-MISC – The timing required to send these forms to employees and vendors remains the end of January. However, the extended deadline for filing the electronic version of these forms to the IRS and Social Security Administration is now a full month earlier. This is done to allow the IRS to match records with early filed tax returns. The prior timing gap was ideal for thieves to file fraudulent tax returns.
Earned Income Tax Credit and Additional Child Tax Credit – If you file a tax return that contains either of these credits, do not expect to receive an early refund. The IRS has been mandated to hold these refund payments until February 15th or later. Given the payment backlog this will create, it is still important to file early to get your refund in the queue.
Begin planning now to be prepared for these upcoming changes. Rest assured, we can all look forward to further changes as the IRS continues to address the multi-billion dollar identity theft problem plaguing the Agency.
Do you receive your health insurance coverage through Covered California (“Obamacare”)? If you do, you may have taken advantage of the premium tax credit that helps cover your payments. The credit can be used when your tax return is filed or it can be used to lower your monthly health care payments.
If you chose the advance credit and had a change in circumstances, such as a promotion or a new job that has raised your income, you may no longer be eligible for some or all of that credit and may be subject to a penalty.
To avoid these consequences, it’s important to report those changes to the Covered California when they occur. Otherwise, come your tax filing you might owe instead of getting a refund!