2020 Tax Returns affected by COVID directed laws
For the tax year ending 12/31/2020, there was a law passed in late March 2020 (the CARES Act the Coronavirus Aid, Relief and Economic Security Act) that introduced changes, followed up by several IRS-Treasury-SBA interpretations, Treasury administrative actions (for example delay of the due date of tax returns for 2019 to July 15, 2020) and then in late December the Consolidated Appropriations Act (CCA) 2021 which included additional stimulus and tax law changes that were included in the budget bill. With all of these changes, which affect taxpayers differently attempting to summarize those changes is challenging. Here are some of the highlights of the items that were introduced and should be considered in the preparation of 2020 tax returns.
Economic Impact Payments (EIP) - aka stimulus payments:
After the passage of the CARES Act, the IRS began paying the first round of EIPs to taxpayers. The stimulus was paid via check, direct deposit or a debit card. The amounts of the stimulus were $1,200 for single taxpayers, $2,400 for married joint filers as the base amounts. There is also an additional $500 per qualifying child. The EIPs amounts are reduced for income exceeding $75,000 for single/head of household taxpayers and $150,000 for married joint taxpayers.
As part of the CCA, there was a second round of EIPs authorized. The amounts for these payments were $600 for single, $1,200 for married joint filers, plus $600 per qualifying child. These second round payments were required to be issued by the IRS on or before 1/15/2021 because of the reconciliation of the payments occurs on the 2020 tax return as Recovery Rebate Credits.
The reconciliation on 2020 tax returns will mean that taxpayers that did not receive the amount entitled will be eligible to claim a tax credit for the additional amount. Examples of situations this might apply: 1) taxpayers had a new child in 2020, that would result in adding up to $1,100 in additional credits (subject to income phase out), 2) since the EIPs were based on either 2018 or 2019 filed returns, if those tax returns were above the phase out income range and 2020 income is lower, then the additional amount will be available to be claimed on the 2020 tax return. There may be other scenarios but those are 2 quick examples.
Retirement Plan Impacts:
Waiver of Required Minimum Distributions for 2020 - the CARES Act allowed taxpayers subject to Required Minimum Distributions (RMDs) to skip the withdrawals in 2020. Taxpayers that had taken a distribution were granted additional time to rollover (return) contributions and that would allow them not to be taxed, taxpayers were allowed until August 31st, 2020 to return the contributions and have those qualify as rollovers, resulting in not being taxable.
Coronavirus Related Distributions in 2020 - taxpayers that were impacted by COVID may be eligible to withdrawal up to $100,000 from a retirement account, not be subject to the 10% early withdrawal penalty and spread the taxable income from that distribution over 3 years (2020, 2021, 2022). The IRS has put together a webpage to address this here: https://www.irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras and here: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers These pages include definitions of qualifying individuals, which those diagnosed with the virus OR adversely impacted financially due to furlough, quarantine or illness by themselves, family or members of their household.
Charitable Deductions:
For individual taxpayers, charitable donations have some special treatment. For taxpayers that do not itemize deductions but have made cash donations to 501(c)3 charities, they will be allowed to claim an additional deduction on their taxes of the charitable donation amount, up to $300. For those taxpayers that do itemize, the donation limit for 2020 is capped at 100% of Adjusted Gross Income, raised from 60%.
Business Provisions:
Many businesses were impacted by the virus and legislation aimed to help keep them operating. I just summarizing a few of these provisions as the details can get complex. Some of the targeted assistance include SBA loan programs (Paycheck Protection Program loans - first and second, Economic Impact Disaster Loans), payroll tax credits for retaining employees, payroll tax credits for sick or family leave, payroll tax deferral for employers and employees, a similar deferral is available for self-employed taxpayers - they are eligible to defer up to 1/2 of their Social Security taxes from 3/27 - 12/31. I may be forgetting some, but if you have a business that was impacted, please reach out to your tax professional to discuss the potential benefits available to your business. Especially as the rules related to some of these provisions have been changed, for example employers that received PPP were previously prohibited from claiming Employer Retention Credits at all, the December legislation has changed that.
Other Miscellaneous Items:
The IRS has announced that e-file for individual returns will be opening February 12, 2021. Some tax software providers are accepting returns but the understanding at this point is that they will be held and submitted upon opening of the IRS in February.
The IRS is also still behind on processing mailed documents, estimates range from a few million pieces to 11 million or more. The past several years the IRS has been impacted by government shutdowns which lasted a few days and took a few months to recover from, with this virus having resulted in IRS service centers closing for a couple of weeks, IRS employees working from home and other challenges, my estimate is that the IRS will take a couple of years to recover from the effects. The IRS phone lines have been overwhelmed and that causes frustration by the "customers" of the IRS, the taxpayer and the tax professional community. If you do speak with an IRS employee, please make extra effort to be considerate to them as they are overwhelmed with the backlog and receiving comments that convey a lack of appreciation.
This filing season is going to be a bumpy ride, either due to many legislative changes or due to the backlog for the IRS.
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