The American Rescue Act and the CARES Act made important changes in tax law for 2020. These changes affected unemployment benefits, Obamacare subsidies, retirement income and taxes on self-employment.
Let’s look at each one and how it can affect you and your tax situation. Sorry in advance as this is going to be quite dense and complicated.
Unemployment benefits: Unemployment benefits are usually taxed by the federal government and many federal states. However, many states have not withheld federal income tax from the substantial additional unemployment benefits offered under COVID relief packages including the CARES Act.
Millions of taxpayers would have received substantial taxes on their unemployment benefits. The American Rescue Act (ARA) excluded $ 10,200 from federal taxes, otherwise taxable unemployment benefits (per person for incomes less than $ 150,000). Unfortunately, the ARA was passed in the middle of the tax filing season after millions of tax returns had been filed that were affected by the exclusion. IRS to the rescue.
The IRS has announced that it will automatically make adjustments to submitted returns and issue refunds if necessary. The IRS will also make adjustments to other tax breaks based on the exclusions, such as: B. Earned Income Credit. Taxpayers do not need to do anything to get the benefits of exclusion from unemployment benefits. No changed returns required. (One exception: if the exclusion entitles a taxpayer to a program that was not already included on their tax return, an amended tax return will be required to take advantage of that program.)
“OBAMACARE” GRANTS (ADVANCE PREMIUM TAX CREDITS, APTC): In order to ease the burden of the pandemic on lower-income Americans, ARA has an obligation to repay excess subsidies that will become available during 2020 for participants in the The health insurance plans offered may have accumulated, the market eliminated.
When applying for MarketPlace insurance, the applicant provides an estimate of expected income and the grant is calculated from that income estimate. If the actual annual income exceeds the estimate, part of the subsidy must be repaid and is made via the income tax return.
Again, the ARA passed in the middle of the tax filing season, and millions of taxpayers with APTC refunds had already filed tax returns, resulting in many unexpected taxes being due. IRS to the rescue. The IRS has just announced that it will make the necessary adjustments to the returns submitted and provide refunds for anyone who has already submitted and paid for the APTC refunds. No changed returns required.
Both actions by the IRS are welcome news for tax advisors and taxpayers. Modified returns are a major nuisance for everyone, including the IRS.
Although the CARES Act is less widespread in its effects, it does offer relief to taxpayers who have withdrawn money from retirement accounts (IRAs or 401Ks) to offset the impact of the COVID pandemic on family income.
Usually, withdrawals from retirement accounts before the age of 59 carry a penalty equal to 10% of the withdrawal. There are several exceptions to the penalty and for 2020 it is enough just to claim that the pandemic withdrawal was necessary to get rid of the penalty.
Taxpayers who did not claim the exemption on their 2020 tax return can file an amended tax return for the refund of the fine. (Check your 1099-R for code 1 in box 7 to see if there is a penalty indicated.) The CARES Act has also authorized taxpayers to spread the tax implications of retirement over a period of three years from 2020 . The amount withdrawn would not change, but the 2020, 2021 and 2022 tax years would include a third of the 2020 departure as taxable income. A bit of a complicated process, but it could be helpful for taxpayers who have made a major retirement account withdrawal, especially if that withdrawal was premature.
SELF EMPLOYMENT TAX (SOCIAL SECURITY TAX): The self-employed, usually those who file an Appendix C as part of their tax return, pay the employer’s usual share of social security tax as part of their income tax return.
In order to provide some relief to the self-employed taxpayers so badly affected by the pandemic, the CARES Act authorized the IRS to give self-employed taxpayers the opportunity under certain circumstances to spread the tax on self-employment over two years (2021 and 2022). Experience with this benefit shows that the circumstances required to avail it seldom make it advantageous for self-employed taxpayers.
NORTH CAROLINA. The state unemployment benefit exclusion of up to $ 10,200 per person is NOT currently applicable in North Carolina. North Carolina Income Tax Act does not automatically follow federal law. The General Assembly is likely to consider this issue at its next meeting. If the General Assembly decides to follow the federal exclusion, taxpayers may need to file an amended North Carolina statement to enforce the exclusion. APTC, retirement income, and self-employment tax issues are strictly federal and do not affect North Carolina tax returns.
FINALLY COVID RELIEF SUBSIDIES:
Just a note on the subsidy payments, the first in spring 2020 (USD 1200 per adult, USD 500 for dependents under 17 years of age), the second in January 2021 (USD 600 per adult and dependents under 17 years of age) and the third in spring 2021 ( including US $ 1400 per person (all dependents), all such payments are NOT subject to income tax. If any of these payments were not received by direct deposit or check (or debit card), the IRS will require a 2020 tax return to claim payment. This applies to all those seeking payment, including those with no income who would not normally file a return. Currently, the easiest and cheapest way to archive is to visit the IRS website and use one of the free filing options.
Marshall Casse, Jan Grossman
Haywood County TAX AIDE team