This year has presented obstacles that most could not have fathomed. We have all been confronted with navigating forced distance from our family and friends, disruptions to our personal life, financial uncertainty, and a new way of working. Though the start of the pandemic seems light years behind us as we’ve become accustomed to this new way of life, the 2021 tax filing season will require us to look back at the events of this year and recall the uncertainty and financial impact that we faced. Stimulus payments, gig work, unemployment income, and pay reductions will add new components to tax filing that many have never encountered.
Filing tax returns has never been at the top of the fun list. Add a pandemic to the mix and things become exponentially more complicated. Picture yourself buried under mounds of paperwork with your accountant visor on, navigating the wild ride that has been 2020. Okay – maybe it won’t be that bad if you come to the table prepared and ready to go with all of the critical information needed to prepare your return.
HOW CAN YOU BE PREPARED?
Additional documents may be required to file your federal tax return if Economic Impact Payments or unemployment benefits were received. While the Economic Impact Payment will be treated as a credit advance and is not considered taxable income, Notice 1444 Economic Impact Payment should be used when preparing your 2020 return. Unemployment benefits are taxable at the federal level and should be included as income. Many states exclude unemployment benefits from taxable compensation, so check with your state agency to understand how this should be treated on your state return. Unemployment benefit recipients should receive a 1099-G from the state agency that lists any benefits paid and any federal or state tax withheld.
Many individuals weathered the storm of furloughs or pay reductions by taking advantage of gig work or essential work opportunities. As the demand for essential services increased during the pandemic, the need for delivery drivers, stock clerks, and personal shoppers grew. Performing gig work while unemployed or furloughed helped many to maintain financial security when normal employment became unavailable. Depending on the type of work performed, you may have been paid as an employee or a 1099 contractor. Be sure to have all income documents ready when preparing your taxes – both W-2s and 1099s. If paid as a 1099 contractor, you may be subject to self-employment taxes.
The Coronavirus Aid, Relief, Economic Security (CARES) Act offered financial relief by eliminating early withdrawal penalties on up to $100,000 from certain retirement accounts through the end of 2020. While early withdrawal penalties are waived under this act, withdrawals are still taxed as ordinary income. Be sure to include any 1099-Rs for retirement account distributions when filing your 2020 return.
HOW CAN EMPLOYERS SUPPORT THEIR PEOPLE?
Tax filing can be complex even in a typical year. With an incredible number of pandemic related legislation changes implemented, it is more important than ever to keep informed and come prepared when filing your 2020 return. For many employees, alternative income sources are unfamiliar, and reduced (or increased) income may have a substantial impact on annual tax liability. Provide your employees with tips to help them prepare in advance for tax filing so that they are not hit with unexpected challenges. Encourage them to take advantage of the free resources provided by the IRS, including the IRS Tax Filing Tips page for helpful guidance on preparing for the 2021 tax season or the IRS Tax Withholding Estimator to determine the appropriate amount of tax to withhold from pay in 2021.
Don’t risk an inaccurate or late return – stay in the know and start gathering information as soon as possible to ease the complications of tax filing in 2021!
Aires is not a professional tax advisor, legal firm, or accounting firm and assumes absolutely no obligations or responsibilities for the accuracy or completeness of this information or any errors or omissions associated with it. Readers should not rely on this information in substitution of actual tax, legal or accounting advice as it is general in nature and subject to change. It should be used for informational purposes only by the reader. If further or case-specific information is desired by the reader, Aires recommends that individual consult an applicable licensed professional.