Navigating COVID Taxes with a Charlotte CPA
If you are among the millions of Americans who have received or will receive a coronavirus economic impact payment from the federal government, you no doubt have questions about how to handle the payment when you file your taxes, including:
- Are economic impact payments considered taxable income?
- How will my economic impact payment affect my income tax refund?
- Are there situations where I may have to repay my economic impact payment?
- How do economic impact payments affect eligibility for unemployment and other benefits?
The $2.2 trillion coronavirus relief package passed by Congress provided for one-time payments of $1,200 for individuals making up to $75,000 per year, $2,400 for couples filing jointly, making up to $150,000 per year, and $500 for children under the age of 17. Individuals making between $75,000 and $99,000 and couples earning between $150,000 and $198,000 will receive reduced payments. Although commonly referred to as stimulus payments, these payments are prepaid tax credits for the 2020 tax year. This means that you will not have to consider the payment as income when you file your 2020 taxes, and the payment will not negatively affect any tax refund that you would otherwise receive.
The IRS will use the information from your 2019 or 2018 tax return to determine if you are eligible for the economic impact payment and then reconcile your eligibility when you file your 2020 taxes. This is relatively straightforward for individuals whose incomes don’t change much from year to year. What about individuals who experience a significant change in income or other major life events during 2020?
- If you were disqualified for an economic impact payment based on your 2018 or 2019 income but would qualify based on your 2020 income, you will receive the payment when you file your 2020 taxes.
- Individuals who receive economic impact payments but who would not have qualified based on their 2020 income will not be penalized or have to pay the money back.
- Individuals who have a child during 2020 will be able to claim an additional $500 as a credit on their 2020 taxes.
If you have recently experienced or are expecting a significant change in income or a significant life event, such as the birth of a child, you should consult a Charlotte CPA to determine how these changes will impact your eligibility for an economic impact payment.
A tax advisor in Charlotte NC can also advise you on how to utilize the extended tax filing deadline to your advantage. For example, you may want to postpone filing your 2019 return until you get your economic impact payment or until the July deadline if you qualify for the payment based on your 2018 income but would not qualify based on your 2019 income.
The coronavirus relief bill also provides expanded unemployment benefits, including an extra $600 a week through July, for those who lose their jobs during the pandemic. Economic impact payments are not considered in determining eligibility for Social Security or unemployment. The expanded unemployment benefits also will not disqualify individuals from receiving Medicaid or benefits under the Children’s Health Insurance Program; however, the extra benefits may affect eligibility for the Supplemental Nutrition Assistance Program and insurance premium subsidies under the Affordable Care Act.
It is important to remember that unemployment benefits are subject to federal income tax and possibly even state and local taxes. The easiest way to deal with this is to fill out a form requesting that the payor withhold 10% of the weekly payment for taxes. You can also opt to make quarterly payments directly to the IRS. The third option is to simply pay what you owe when you file your taxes. This may work if you think your financial situation will dramatically improve by that time. Still, there is also the genuine possibility that you could be left with a significant tax bill that you find difficult to pay. Unemployment benefits that do not come from the federal or state government, such as voluntary contributions to a non-union unemployment fund, are taxable if they exceed the amount that you contributed.
The COVID-19 pandemic has complicated the way we live our daily lives as well as our financial lives. As an experienced tax advisor in Charlotte, NC, Scott Boyar can walk you through the intricacies of the ever-changing federal and state tax landscape. Schedule a consultation today by calling 704-527-2725.
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