As tax season gets into full swing after the roller coaster year that was 2020, tax experts say this year will be unlike any other when it comes to filing taxes.
The first big change comes as the IRS has moved the initial filing date to Feb. 12, whereas returns usually would already have started being accepted in January.
Julie Sturgeon, a certified public accountant, said ahead of that date that a “floodgate” of activity was expected then — which turned out to be exactly what happened.
This change has essentially caused tax preparers to lose a third of tax season, added Karol Johnson, an enrolled agent and partner at All Valley Tax.
As can be expected, the pandemic has been at the forefront of many tax changes this year for a few reasons.
Anyone who got a stimulus check in 2020 will have to report it on their taxes, but that money is not taxable income — so it won’t affect your return, according to Johnson.
Instead, Johnson explained that anyone who was underpaid in their stimulus could get the difference sent to them as part of their tax return.
“There’s some really positive things,” she said. “Let’s say you had a baby last year. We can get the extra stimulus payments on this year’s tax return.”
With Congress in talks for a third stimulus payment, those who have had their income increase the past year, or have yet to receive their second stimulus payment, may want to wait to file this year, as it can affect their payment, Johnson added.
Paycheck Protection Program loans
For business owners who received PPP loans in most states, Congress clarified language in the most recent relief bill to make PPP expenses, like rent and payroll, completely tax-deductible.
Currently, California doesn’t allow these deductions, but Assembly Bill 281 was introduced in the Legislature to conform California law with federal law, Sturgeon said.
“What I’m hearing is that if businesses have received a PPP loan, and it’s forgiven, their best bet is to go on extension and to wait and see what happens with the state, rather than filing and then having to go back and amend return,” she added. “That makes it a little bit more complicated and probably doesn’t sit very well with a lot of business clients, because they want to get their tax returns done.”
Self-employed tax credits
Under the Families First Coronavirus Response Act, employers who provided qualified sick and family leave, for those who, due to COVID-19, were unable to work relating to their own health or a family member’s, were to receive a payroll tax credit to offset the costs for doing so.
With tax form 7202, self-employed individuals can figure in the amount to claim.
“If you were off up to 10 days, there is a credit, and it’s a phenomenal credit, on the bottom line of your tax return, especially for sole proprietors,” Johnson said. “It’s a great credit that will help.”
While stimulus money may not be taxable, unemployment benefits certainly are.
Many who didn’t withhold any money from those payments for tax purposes are in for a shock when that money comes due this tax season, added Deborah Ramirez, a KPMG accountant.
“Even if you had taxes withheld, you’re probably still going to owe money because there was no way to withhold taxes out of that federal freebie, the extra $600 they were giving earlier in the year, and then the $300 they’re giving now,” Johnson said.
Employee retention tax credit
The most recent COVID-19 relief bill passed in December extends and expands the CARES Act employee retention tax credit through June 30, Ramirez said.
“This is a credit employers got for keeping employees on their payroll,” Ramirez said.
The refundable tax credit increased to 70% of up to $10,000 in wages paid by an eligible employer for each quarter whose business had been financially impacted by COVID-19, and is now available to businesses who received PPP loans.
This year, as changes are continuing to take effect, it is more important than ever to be prepared, Ramirez said.
“Regardless of if you’ll be doing those taxes in person or virtually, these changes mean that we’re going to need more time to gather the necessary documents with less time in the tax season,” she added.
Johnson and Sturgeon agreed, with Sturgeon adding, “I would recommend people gather their documents, anything that they do have, start getting that all together just to get it all organized and be ready to go when things open to start moving along.”
For more information from the IRS on tax changes in 2021, visit irs.gov/newsroom/get-ready-for-taxes-whats-new-and-what-to-consider-when-filing-in-2021.