The last few weeks we’ve seen a lot of crazy things take place.
Thousands have gotten sick with the COVID-19 virus, and hundreds have died. Hospitals in some areas are struggling to keep up.
In the past few weeks the government has shut down basically the entire economy in order to “flatten the curve” and keep the virus in check. Only essential businesses and companies are still operating.
It has seemed necessary to take drastic measures in order to keep the sickness at bay and keep our hospitals under capacity, but at the same time the economy has taken a huge hit.
Many small businesses operate on a thin margin, and now that they’re being forced to close their doors for weeks or months at a time, many of them are having to lay off workers, furlough workers or in some cases close their businesses for good.
The government realizes that they have put this shutdown in place, and as a result they are doing what they can to provide some help to companies, and workers via the CARES Act, signed into law on March 27th, 2020.
Tax Filing and Payment Deadline Extended to July 15, 2020
After COVID-19 really started becoming serious in the United States in early March they started talking about possibly pushing back the tax filing and payment deadlines.
Typically the filing deadline would fall on April 15th or the closest work day to that. This year the filing and payment deadline was April 15th, 2020.
On March 21st, 2020 the Treasury Department and the IRS announced that due to the Coronavirus and pandemic response that the federal income tax filing due date was automatically extended from April 15th, 2020, to July 15th, 2020.
Taxpayers can also defer income tax payments that are due on April 15th, 2020 to July 15th, 2020.
For me that means that any taxes still due for 2019, as well as my 1st quarter estimated tax payment that is usually due on filing day are no longer due until July.
It should be noted that if you make estimated tax payments, that the June 2nd quarter estimated tax payments are still due, so if you defer the April payment you’ll essentially be paying your 2nd quarter taxes before your 1st quarter taxes. An interesting quirk for 2020.
Another thing to remember is that while the federal government has extended the tax filing deadline, not all the states have yet. So that might mean that your federal taxes aren’t due until July 15th, but your state is still due on April 15th. Among the states that haven’t extended filing dates yet are Alaska, Florida, New Hampshire. Still other states have the same deadline, but are providing extensions if you ask for one. Here’s an article that lists the state filing deadlines.
Tax Implications Of The 2020 Stimulus Check And CARES Act
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law by President Trump on 3/27/20.
The 2.2 trillion stimulus package includes measures to help businesses hurt by the pandemic, as well as direct payments to citizens who have been hurt by the pandemic.
The 2020 Stimulus Check – How Much Is The Economic Impact Payment?
So how much are people going to be receiving for the direct economic impact payments included in the CARES Act?
- Individual taxpayers will be receiving a $1,200 payment.
- Couples will receive $2,400.
- If you have a qualifying child (16 and under), each child will add an additional $500.
- Once taxpayers reach an adjusted gross income threshold of $75,000 ($150,000 couple) the refundable tax credit begins to phase out at a rate of $5 for every additional $100 above the limit. Once income reaches the level of $99,000 ($198,000 couple), the credit is phased out completely.
The payment will be sent out based on your adjusted gross income on your most recent tax filing. So if you have filed your 2019 taxes, it will be based on that. If you haven't filed for 2019, it will be based on 2018. You do have to have filed taxes for 2018 or 2019, unless you receive a Form SSA-1099 Social Security Benefit Statement or a Form RRB-1099 Social Security Equivalent Benefit Statement. So if you haven't filed yet, you should do that as soon as possible.
This table below shows the income limits of the credit, and the level at which the credit phases out, by filing status. To receive the full credit your income must be below the lower limit.
Adjusted Gross Income Limits For Stimulus Check |
|---|
Filing Status | Check lowered $5 for every $100 above: | Stimulus payment phased out above: |
|---|---|---|
Single Payment: $1,200 | $75,000 | $99,000 |
Married filing jointly Payment: $2,400 | $150,000 | $198,000 |
Head of household Payment: $1,200 | $112,500 | $136,500 |
Will I Have To Repay The Stimulus Check At Tax Time In 2021?
One question I've gotten over and over about the economic impact payment, is whether or not people will have to repay the credit when it comes time to file their 2020 taxes in 2021.
In the past there have been credits that had to be repaid, but this payment is different. This stimulus measure is essentially a refundable tax credit, which acts like a refund owed that you get in advance of filing your 2020 taxes.
Is The Stimulus Check Taxable Income?
The stimulus payment is a refundable tax credit and is not looked at as earned income. As a result it is not taxable.
Think of it as a bonus tax refund that you're receiving early for 2020 taxes.
It will not increase your taxable income, and you will not have to pay taxes on it or repay it.
Can I Still Get The Stimulus Check If I Don’t Qualify Based On My Past Returns?
If you made too much in adjusted gross income on your 2018 or 2019 taxes and received no stimulus payment or a reduced payment in 2020, you could still find yourself eligible for the economic impact payment.
If your 2020 income goes down and ends up being below the income phaseout limits of the credit that are shown above, you will be eligible full credit in 2021 when you file taxes.
Just file your taxes as you normally would, and your new or increased stimulus payment will be added to your refund (or reduce your tax owed) when you file taxes in 2021.
Will I Have To Repay The Stimulus Check If I Earn Too Much In 2020?
According to what we've read and statements from members of congress, if you were eligible for the refundable tax credit based on 2018 or 2019 adjusted gross income, but then ended up making more than the phaseout limits in 2020, you would not have to repay the stimulus payment in part or in full.
There has been some debate on this question, and some say that it isn't directly addressed in the legislation, but guidance from multiple members of congress have said that the credit would not have to be repaid. If you find otherwise, please let us know.
No Tax Penalty For Early Withdrawals From Retirement Accounts
Normally when you withdraw money from a retirement account before retirement age there is a 10% penalty for early withdrawals. That penalty has temporarily been waived for distributions up to $100,000 from qualified retirement accounts. You just have to be in one of the following situations:
- If you have been diagnosed with COVID-19.
- You, your spouse or dependent has been diagnosed with COVID-19.
- If you have adverse financial distress due to a job loss, quarantine, reduced hours, closing or reducing hours of a business, or are unable to work due to lack of childcare.
Taxes can also be avoided on the withdrawal if the money is replaced in the account within 3 years. If it isn't returned, the taxes can be paid over a three year span.
Now I wouldn't recommend taking money from your retirement accounts, especially after the market has gone down substantially because you're locking in investment losses.
On the other hand if you really need to use the money to pay for necessities, it may be the only option if you don't have an emergency fund saved, or enough unemployment benefits to pay your bills. I would only consider doing this in the most dire of circumstances.
Deferment Of Social Security Taxes For Businesses And Self-Employed
Another piece of the CARES Act was a deferment of Social Security taxes for employers, as well as self-employed individuals.
That means that employers and self-employed people can defer the 6.2% employer share of Social Security taxes for 2020. The taxes still have to be paid, however.
The deferred taxes would have to be paid over the next two years. Half would have to be paid by 12/31/21, and the other half by 12/31/22.
If an employer has a Small Business loan forgiven via Section 1109 of the CARES Act, they would not be eligible for this provision.
Tax Implications Of COVID-19 Unemployment Insurance Benefits
With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, there were multiple new unemployment insurance benefits added to help people who are currently out of work through no fault of their own.
Among the expanded COVID-19 unemployment insurance benefits are:
- 13 weeks in additional unemployment benefits added to the typical 26 weeks of unemployment that most states provide, at the same rate (see the article linked above for benefit length for all 50 state). This benefit runs through 12/31/2020.
- A new $600/week benefit payment in addition to existing unemployment payments. This extra benefit is good between April 5, 2020 and July 31, 2020. You can receive this extra benefit until you’ve exhausted your state benefits. In some states that more than doubles the weekly maximum benefit amount, and in some cases means some people are earning more by being unemployed. See the weekly max benefit for each state in the table down below.
- Unemployment benefits now available for part-time and contract workers as well as self-employed individuals.This is huge if you’re a gig worker or self employed.
- Reimburses states 100% for 1 week waiting period for unemployment benefits that most states have, in hopes that they will allow people to apply earlier.
Are Unemployment Benefits Taxable Income?
With all of the new unemployment benefits including 13 additional weeks of payments, and an extra $600/week for 4 months, the question a lot of people have is, are my unemployment benefits taxable?
The answer in most cases is yes. The standard and expanded unemployment benefits are considered taxable income by the federal government, and many states consider it taxable as well (although not all).
The IRS says that since the money is typically classified the same as the income you earn through work, it is taxable.
The IRS has an interactive tool that you can use to determine if the income you receive will be taxable.
Will I Receive A Tax Form Reporting How Much Unemployment Income I've Received?
When you receive unemployment benefits in a particular year, the state you received benefits from will report the amount of benefits you received on Form 1099-G. That form will show any taxes that were withheld from your benefit amount.
When I applied for unemployment benefits in Minnesota, at one step in the process it asked me whether I wanted taxes withheld from my weekly payments, or if I wanted the full amount. If you take the full amount you will be responsible for any taxes owed on the benefit.
In most cases you'll likely just want to have them withhold taxes from your payment so you don't have to worry about it later. But if you're in dire straits and need the money now to pay bills, you could pay the taxes later via quarterly estimated taxes.
Will The Extra $600 In Unemployment Affect Income Based Benefits
With the addition of the $600 extra in unemployment benefits, some have questioned whether that income would affect their eligibility for income based health insurance programs like Medicaid or Children's Health Insurance Program.
The short answer is that while the income is taxable, like other unemployment benefits, it should not affect your eligibility for income based health insurance programs.
For other means-tested programs besides Medicaid or CHIP, the benefits will count as income when determining your eligibility.
Stay On Top Of IRS Guidance When It Comes To The Tax Impact Of The CARES Act
So as things stand currently with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the impact on your tax situation will vary, depending on which benefits you're talking about.
The economic impact payment, or stimulus check as most people call it, is not taxable income, and will have no negative impact on your tax situation.
Unemployment benefits are taxable for federal taxes, and is taxable for most states as well. In my estimation you're best off having your state unemployment agency withhold the taxes for you, otherwise you'll need to pay the taxes via estimated taxes - if you owe.
The impact of other provisions will vary, but it's important to stay on top of those things as they develop to make sure you're making the right decisions for your family come tax time.
Have questions about other provisions of the bill and their tax impact? Leave us a comment and we'll see if we can find an answer for you.
Peter, I retired four years ago but still have managed to earn a little over six figures a year doing one day a week consulting. My AGI last year was just over $100K. As joint filers my wife and I will get $2,400 of stimulus money because the phase down doesn’t start until AGI is over $150K. As a multimillionaire who only works to stay mentally sharp and because it is sort of fun, it seems odd the government is giving me free money? I’ll take it because when compared to the many hundreds of thousands in taxes I’ve paid it is an insignificant rebate, but what are your thoughts about this kind of handout being based only on income and not wealth? I’m generally opposed to wealth based taxes because it punishes frugal people and rewards over spenders.
Good morning Mr. Anderson,
Two unrelated questions;
1) The phrasing above seems to imply that if I were eligible for a $2000 refund (not including the CARES Act check) on my 2020 taxes filed in 2021, then the CARES Act check would be “subtracted” from my refund and I would end up owing $400. If that is not the case, then exactly what does “… bonus tax refund that you’re receiving early for 2020 taxes” mean? Is “bonus” the operative word?
2) I am the one impacted by the shutdown. My wife’s retirement account is where the money is. Does she qualify for the tax deferment on a withdrawal from her retirement account based on my employment being impacted by COVID-19?
Thank you for any insight on these matters,
Sincerely,
Alfred Arborn
Alfred, the phrasing may not have been the best, but it’s best to think of the stimulus as a bonus in that it’s an extra refund on top of whatever you’re already getting back, or owe. So if you are already getting a $1,000 refund, with the extra $1,200 stimulus you would be getting $2,200. You get the $1,200 stimulus now, unless your 2018 or 2019 taxes show you don’t qualify. If your final 2020 income numbers show that you qualify after all, you can then claim the $1,200 stimulus when you file for taxes in 2021. At that time you’ll get the added $1,200 refundable tax credit added to your final numbers. If you owe $1,000 you’d get $200 back. If you are getting a $1,000 refund, you’d get $2,200 instead.
The way the 401k withdrawal tax deferment reads to me the individual had to have been impacted by COVID-19 personally, but this provision might complicate it: “If you have adverse financial distress due to a job loss, quarantine, reduced hours, closing or reducing hours of a business, or are unable to work due to lack of childcare.”. Honestly, I don’t have a for sure answer on this one for you, it will likely require some further study and possibly a call to the IRS or your accountant for clarification.