2021 Tax Season Updates
Partial unemployment income to be exempt from tax for 2020
AB-80: California PPP loan legislature updates
Individual income tax filing deadline has been extended to May 17, 2021
The American Rescue Plan Act, signed on March 11, 2021 by President Joe Biden, waives federal tax on up to $10,200 of jobless aid, per person, received in 2020. It restricts that benefit to taxpayers who earned less than $150,000 last year. This ceiling is the same regardless of filing status, such as single or married. The $150,000 limitation is based on Adjusted Gross Income. If your income exceeds the limitation by a small margin, an IRA, SEP-IRA, or Health Savings Account contribution may be an option.
Many states neglected to include an option for a 10% tax withholding leaving many who received unemployment benefits with a surprise tax bill. If you are receiving unemployment benefits, please make sure you check the box for withholding federal income tax on your benefits. Also, the 10% withholding may be inadequate to pay the tax owed on your unemployment benefits received. Review your marginal tax rate and set aside enough money to cover the additional taxes. This will save a surprise and grief when filing your 2021 tax returns next year.
The IRS must develop the forms, calculations, and regulations to update the 2020 tax forms for compliance with newly passed legislation. It will take some time (we think a few weeks) for the IRS to update. Once that is completed, the tax software companies will need to update in order to electronically file tax returns. That tax software companies will update quickly and are already making preparations.
We recommend clients that received unemployment benefits in 2020 hold on filing their income tax returns until the updates have been completed. The IRS has advised that taxpayers should not amend their already filed returns to claim the $10,200 exemption from taxable income. It is likely that the IRS will adjust the filed returns and issue refunds without any action required by the taxpayer. This will not take place right away, and we expect those notices and corresponding refunds to start this summer.
California has yet to make a final determination on whether to conform state tax code to current federal tax rules related to the treatment of expenses associated with forgiven Paycheck Protection Program (PPP) loans. AB 80 was introduced earlier this month as a legislative vehicle to partially conform and allow some PPP related deductions for state tax purposes. However, this bill has not been acted upon by the Legislature. If AB 80 or a similar bill passes the state legislature and becomes law, filed tax returns will require an amendment to realize the reduction in state taxable income. Individual taxpayers that receive K-1’s from business with amended returns will need to amend their individual tax return as well.
We recommend reaching out to our office to discuss the timing of filing your tax returns this year. Many clients may benefit from delaying filing until this summer. Each taxpayer and situation is unique. Your business and family goals should be considered when determining the best time to file your tax returns. SoCo wants to get your tax returns ready to file so that we know the amounts due or expected as a refund. We are working hard and not slowing down.
The individual income tax filing deadline has been extended to May 17, 2021. Most states are automatically complying with the new individual income tax filing deadline. This extension is different from the extension offered in 2019. Taxpayers can file an extension of time up to October 15, 2021. The October 15 deadline will not be extended.
All taxes are still due by April 15, 2021. The 1st quarter estimated tax payments are due on April 15, 2021 and have not been extended.
The tax deadline was not extended for corporations or other entities.
We understand that changes and uncertainty during this last year have been tough. Our team is investing hours staying current with tax law changes and are on watch. If you have any questions about any of the changes above please feel free to reach out to the SoCo Team!
UPDATE: In reference to the above, the IRS announced they will be internally calculating the refund and will be sending out any possible returns directly. Keep a watch out for any possible paper checks or debit cards.
