Tax experts say 2021 will be unlike any year in history when it comes to filing taxes for millions of Americans.
“It’s like drinking from a fire hose right now,” says Brett Gottlieb, the founder of Comprehensive Advisor. “There’s so much change to the tax code.”
The changes come mainly as a response to the coronavirus pandemic. Tax preparers have been working non-stop to figure it all out.
“This year, folks lives just changed so significantly,” says Nathan Rigney, the Principal Tax Research Analyst for H & R Block. “So their tax situation changed.”
Rigney and Gottlieb identified four main reasons taxes will be different for people this year: Stimulus Checks, Unemployment Benefits, PPP Loans, and Retirement Savings Withdrawals.
Anyone who got a stimulus check in 2020 will have to report it on their taxes. However, that money is not taxable income. Rigney says the reporting is to “reconcile” the payments.
“Reconciling on your 2020 tax return can lead to a little more of a stimulus payment,” he says.
Rigney explains that anyone who was underpaid in their stimulus could get the difference sent to them as part of their tax return. And if you received too much, you won’t have to pay it back.
Unemployment Benefits are taxable income, and the state you live in will send you a Form 1099-G detailing how much you got and how much was withheld for tax purposes.
But many Americans who received unemployment benefits did not withhold any money from those payments. Because of that, Gottlieb says they may be in for sticker shock when their taxes come due.
“If you didn’t request the voluntary withholding for tax purposes, you need to make sure to check your savings or your emergency pot make sure you’ve got some money to cover that,” Gottlieb says.
There is good news for business owners who received PPP Loans in 2020. The recent relief bill in Congress clarified language to make PPP expenses like rent and payroll completely tax-deductible.
But, Gottlieb says, business owners need to keep detailed records of what they spent and how.
“Track it,” he says. “Keep it ready and just be prepared to dig things up as you need to make sure you fill out your taxes appropriately.”
Retirement Savings Withdrawals
Many people dipped into their retirement savings to make ends meet, and they will owe taxes on what they took out. Gottlieb and Rigney say you won’t be assessed a tax penalty on 401K withdrawals, but you will still have it taxed as income.
People have three years to pay that tax, so Gottlieb suggests working with your tax preparation professional to put that plan in place.
In general, both agree that people will need to do a little more preparation for taxes in 2021.
“Give your CPAs time,” says Gottlieb. “Let them have the opportunity to digest these big changes and understand that it’ll be a little longer this year.”
“If you haven’t been tracking income and expenses all year, now’s the time to go try to identify those,” says Rigney. “Try to gather them so when you try to complete your tax return, you’re ready for it.”
They also advise finding a useful tax calculator online so you can estimate your tax payments and be ready.
When it comes to safety during the Pandemic, H&R Block says they will have offices open for in-person meetings, with full safety measures in place. But they’ll also accommodate virtual appointments and allow people to do their tax preparation online.
Meanwhile, the IRS has several pages of information for people about tax changes during the pandemic. They have not indicated any plans to extend the April 15th deadline to file.