Tax season is right around the corner and many filers may have some different questions about their returns on the heels of an unprecedented year.
The federal government doled out billions of dollars’ worth of stimulus aid to American households to help offset the devastating financial effects of the coronavirus pandemic.
That cash may have technically boosted incomes, but it is not necessarily considered income for tax purposes.
Here’s a look at the tax implications of some of the stimulus benefits provided by the federal government:
Any money individuals received in the form of a direct payment from the IRS and the U.S. Treasury Department will not be subject to income taxes because it is technically considered an advanced refundable tax credit.
If you are one of the Americans who has not received stimulus cash – any or all of the checks that you are eligible for – you should claim them through the Recovery Rebate Credit on your 2020 Form 1040 or 1040-SR.
You can also claim this credit if you did not receive the full amount you were owed.
Many people lost their jobs in 2020 and became eligible for expanded unemployment benefits, but some people did not know those benefits counted as taxable income.
The IRS requires people to report income received in the form of unemployment.
Failure to do so could result in taxes owed to the IRS, and failure to pay could result in potential penalties and interest as well.
Others were unaware that taxes are not automatically withheld.
A flat federal tax rate of 10% can be withheld from beneficiaries’ paychecks.
If you do not have taxes withheld from your checks, you may have to make quarterly estimated payments to the IRS. These payments are typically required of individuals who expect to owe tax of $1,000 or more when their return is filed.
Unemployment income and withheld taxes will appear on a 1099-G statement that is typically mailed at the end of the year.
Payroll tax deferral
Some U.S. workers had their payroll taxes deferred under former President Donald Trump’s administration for the final four months of 2020.
The payroll tax is paid separately from federal income taxes. It funds Social Security and Medicare, but the memorandum applied only to the 6.2% Social Security obligation.
These deferred taxes, however, need to be repaid.
Recent IRS guidance stipulated that affected workers will have the entirety of 2021 to repay those deferred obligations.
Employers have different plans for collecting those payments
The program was mandatory for some U.S. military members and federal employees.
Paycheck Protection Program tax deductions
In late-December, the government provided for the full deductibility of ordinary and necessary business expenses paid for with forgiven PPP loan money.