While many of our normal routines remain altered by COVID, tax season will still arrive right on time…of course. Considering the madness of 2020 and the confusion about what’s taxable and what isn’t, we reached out to local tax professionals to get their input on all the good and bad news that this season brings.
Let’s Start with the Good News
Stimulus checks are not taxable. “The stimulus checks many Americans received through the CARES act are essentially an advance on a tax credit—the Recovery Rebate Credit,” said Mike Keefer of R. E. Lane LLC. “Also, if you didn’t receive a stimulus check or didn’t receive the full amount, you have the ability to apply for the credit when filing your income tax return.”
Another nontaxable benefit, the Paycheck Protection Program (PPP) provided a lifeline for businesses struggling due to COVID-19. Intended to assist with cash flow for 8 to 24 weeks and backed by the Small Business Association, the PPP loan amount can be forgiven as long as the money was spent on the following:
• Payroll expenses
• Mortgage interest
• Utilities payments
• Operational expenses (HR, software, cloud computing, or accounting needs)
• Property damage costs (due to public disturbances in 2020)
• Supplier costs
• Worker protection expenditures
“Request forgiveness and the loan amount will not be included in your taxable income,” said Keefer. “You’ll also be able to claim tax deductions for expenses.”
Now for the Not So Good News
“Last year’s tax season brought confusion with all the new tax rules from 2019. However, I believe this tax season is going to be extremely challenging for everybody,” said JoAnn Palmieri, founder and president of Palmieri & Associates. “A lot of people are going to be upset when they realize unemployment compensation is taxable.”
Unemployment is taxable on your federal tax return, and that includes Pandemic Unemployment Assistance (PUA) as well as standard Pennsylvania unemployment. However, it is not taxable on your state return if you reside in Pennsylvania.
More unsettling news awaits those who became gig workers in 2020. Gig work includes independent contractors working for companies like Uber, DoorDash and other delivery services.
“The money earned from these jobs is taxable, and unless people paid estimated tax payments throughout the year—and most don’t—they’re going to be in for a surprise,” said Palmieri.
At the risk of being the bearer of more bad news, Palmieri points out another unusual tax situation facing employees working remotely due to the pandemic.
“Even before COVID-19, living in one state and working in another was complicated from a tax perspective,” she said. “Both states are going to want to try to tax your income.”
Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania have convenience agreements that outline how states will treat taxable income. However, with the increase in remote work, many employees are working in areas of the country where there are no convenience agreements. “Without the assistance of a tax professional, you’ll be left to muddle through multiple state tax codes on your own,” Palmieri said.
Do You Need a Tax Professional this Year?
Even people who typically file their own tax returns should consider enlisting the aid of a tax professional this year. Accountants keep abreast of the constant changes to tax laws and updates through webinars and other continuing education.
“The IRS website reports that it takes nearly 20 hours to complete the average tax return with deductions,” said Palmieri. “That’s a layperson buying software, installing the software and inputting all that information, not to mention having questions and trying to find answers to those questions.”
We all know that time is money, and giving up 20 hours of your time is a costly endeavor. “Everybody wants to save money, but most people don’t realize that if the tax preparer finds just one deduction or tax credit you missed or weren’t aware of, the tax savings may very well wipe out your tax preparation fee,” advised Palmieri.
Keefer agreed and pointed out additional benefits. “As a tax professional, my job is to keep up-to-date on these things and to keep my clients informed,” he said. “Tax preparation is the one thing we’re known for, but the bigger thing that a tax professional offers is a plan for the future.
“Unfortunately, most people only seek the help of a tax advisor when it’s time to prepare their tax return,” he continued. “By then it’s too late to benefit from the possible income tax savings ideas a tax professional can offer.”
Even if you typically choose to go it alone when it comes to preparing your taxes, seeking the help of a professional isn’t a bad idea. Let’s face it, after all that 2020 brought us, none of us needs another surprise.