6 Ways Your 2020 Tax Bill Could Increase Because Of The Pandemic
Daily life is a far cry from what it was just a year ago. The coronavirus pandemic drastically changed how we lived, learned and worked in 2020. And various relief programs were established to help those who suffered from business shutdowns and cuts to their income.
“Most of these changes sought to provide relief to individuals and families by providing options for enduring a period of time where incomes may have been drastically cut back or eliminated and the economy on Main Street appeared to be suffering,” said Jeffrey Wood, a certified public accountant and partner at Lift Financial.
Between these relief programs and major lifestyle changes, some people may find that their tax situation was negatively impacted for 2020. To avoid any surprises when you file taxes this year, here’s a look at common situations that could cause your tax bill to increase in light of the pandemic.
You Received Unemployment Benefits
One of the major provisions of the CARES Act was increasing unemployment insurance benefits to include an additional $600 for the first 13 weeks of the pandemic. These expanded benefits were extended for another 11 weeks after the initial period passed.
It’s important to note that unemployment benefits are considered taxable income. Depending on how much you earned in 2019 ― and how long you had a job in 2020 ― it’s possible that you earned more income overall last year with the addition of unemployment benefits.
“Some may discover they have a higher tax liability for 2020 due to these changes,” Wood said. If you didn’t elect to have taxes withheld from your unemployment checks, you’ll need to pay them at tax time.
You Withdrew From Your Retirement Account Early
Another change within the 2020 CARES Act was that individuals younger than age 59 1/2 could take distributions from a qualified retirement plan through Dec. 30 without having to pay early withdrawal penalties.
This distribution could be considered a loan and paid back over the next three years, or it could be a taxable distribution with the tax liability spread over the next three years, Wood explained.
“Until this distribution is paid back, it is required to be recognized as taxable income and would increase an individual’s taxable income for 2020 and potentially the next two years thereafter,” Wood said. If paid back, you would need to amend your tax filings from prior year(s) to recover any taxes that you already paid.
You Worked Remotely In A Different State
Many workers who were lucky enough to keep their jobs began working remotely during the pandemic. Some saw this as an opportunity to relocate somewhere with a lower cost of living, which, in some cases, meant moving out of state.
However, employees who worked in two different states during 2020 may be in for a surprise at tax time.
“It can bring some tax challenges that folks might not be aware of,” said Jason Katz, wealth advisor and principal at Bartlett Wealth Management. For instance, in addition to filing taxes in their state of residence, employees may need to file returns and perhaps even pay taxes in the state where their employer is located, even if they’re working remotely, Katz said.
This will depend on the state, how much time you spend there and how much you earned. Some states have reciprocal agreements with each other to minimize duplicative taxes for employees in this situation.
You Started A Business
The job market took a major blow from the pandemic. Perhaps you lost your job or had your hours cut. Maybe you worried that your income could change at any time. Maybe you simply felt it was the right time to start your own venture or side hustle.
If you started a business or went freelance over the last year, you should get in touch with a tax professional as soon as possible to talk about the taxes you owe and when they’re due, according to Katz. There’s a good chance you need to pay estimated taxes every quarter. “You could face fines if you don’t pay on time,” he said. It’s also a good idea to discuss what kind of business entity, if any, makes the most sense from a taxation perspective.
Your Business Went Virtual
If you were already a business owner before the pandemic, your tax situation could look a lot different for 2020. “Business owners and independent contractors may feel a tax change due to the shift to a stay-at-home, online, remote-working economy,” Wood said.
For example, business owners who may have had lots of travel, hotel and mileage costs to write off in prior years may find these deductions are much smaller and less frequent for 2020, given shutdown orders and social distancing recommendations. Deductions for business meals likely decreased dramatically, as many restaurants shut down for parts of the year or were otherwise limited in their ability to serve customers.
“In addition, the Tax Cuts and Jobs Act applied a 50% limitation on deductibility of food and beverage expenses after Dec. 31, 2017, and virtually eliminated deductions for business entertainment expenses, further reducing the amount that could have been deducted to reduce tax liability,” Wood added. However, the Consolidated Appropriations Act of 2021 changed this tax law and allows the full deduction for business meals and entertainment in 2021 and 2022, he said.
Your Employer Withheld Social Security Taxes
Back in August, the Trump administration offered businesses a voluntary payroll tax holiday. In order to increase workers’ paychecks during the toughest months of the pandemic, employers could opt to defer withholding of the 6.2% Social Security tax from the paychecks of employees who earn less than $4,000 per biweekly period, from Sept. 1 through Dec. 31
The catch? “Deferral is the key word here,” said Jim Pendergast, senior vice president of altLINE, a division of The Southern Bank Co. Those taxes need to be paid back ― from your paycheck.
“These taxes originally would have to be back paid between January through April of 2021, with penalties accruing starting in May,” Pendergast explained. However, last-minute legislation in December postponed payment deadlines until Dec. 31, 2021.
“However, that still means essentially paying back double your portion of Social Security at some point in 2021, which will feel and operate a lot like a tax increase,” Pendergast noted. The IRS warned that some companies may begin withholding those back taxes right away. So, if your company opted into this program, you should check with your payroll department to find out its collection schedule an impact on your pay.
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This article originally appeared on HuffPost and has been updated.
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