Tax time is upon us, but this year is a little different. We experienced a global pandemic last year, and its effects are still wreaking havoc around the world. A staggering number of business closures resulted in historic job losses. Federal and state restrictions placed many businesses on hold for some or all of the year, or possibly indefinitely. This unfortunate downturn had a massive impact on many people’s employment status, to the point where those who needed money couldn’t get any until they received the first wave of stimulus checks.
Top of mind for everyone—in addition to the day-to-day worries of life—was a questionable return to normalcy, missing our hobbies, families, fear of catching the virus, and how we should protect ourselves from it. Beyond all that, one crucial question remains: how does all of this affect my tax return?
If you were unemployed during 2020, you might require extra work to get your taxes in order. It wasn’t typical unemployment, so there is no precedent to guide you. The pandemic was—and is still—a rare and exceptional event that requires expert handling and coordination.
Unemployment benefits qualify as income, and as such, are taxable. Fifteen states don’t currently collect income tax, but for the rest of the country, if you declare residency in one of the other 35 states and have lived/worked there through 2020, your unemployment benefits are taxable. However, those taxes do not count towards Social Security or Medicare; they are counted exclusively towards recorded employment.
The 15 income tax-exempt states are:
- New Hampshire
- New Jersey
- South Dakota
If you live or declare residence in one of those states, you won’t have to register your unemployment benefits as direct income. This also applies to the initial round of stimulus checks, when individuals and families were sent money directly via the CARES Act to assist with bills and rent at the beginning of the pandemic.
Declarations and Withholdings
Withholding income, even on unemployment benefits, is wise for people who might have fluctuating income or unexpected employment gaps. However, in the case of the latter, failure to disclose can severely impact your expectations. The less you withhold, the more you will owe in the initial estimates.
For self-employed people, unemployment counts very differently. As a result of the CARES Act, self-employed individuals who own their own business and write off their overhead became eligible for unemployment benefits if the virus hindered or halted their otherwise regular profits by a significant degree. The method of doing so is similar to the standard methods of applying for unemployment benefits. Individual states handle all unemployment benefit distribution, so the process and thresholds may differ depending on where you live, but the process should be the same.
If you did apply for unemployment benefits, you will receive a Form 1099-G, which details all the benefits you received over the course of the year and that you must declare. While it’s essential to pay your taxes, overpaying can be just as much of a problem when money is tight. Many people still aren’t able to fully pay their tax bills. Come April, when payments are due, there’s not a lot of hope that the situation will be markedly different—consulting a Certified Tax Advisor (CTA) before crunch time is crucial to understanding your options.
For those who do own and operate small businesses, there are deductions to consider. Nearly anything contributing to your business operations can be written off and declared on your taxes as a necessary business expense, sometimes by 100 percent. If you have enough valid deductions, you could even be eligible for a refund, provided your expenditures reached a certain threshold against your profits. When you were out of work and uncompensated by unemployment benefits, disaster relief could be available to you through the SBA.
It’s Never Too Early To Work On Your Taxes
Last year dragged on slowly for some and sped by too fast to control for others. This year will likely be more of the same. The coronavirus’s economic impact will continue to be felt as millions have not yet returned to work in their former capacity.
The way we handle our taxes this year will be unique. Disaster relief, withholdings, declarations, and unemployment are all exceptional circumstances for taxation. Of the 33 million people who applied for unemployment in 2020, for many, it was the first time in their lives. If you’re feeling a bit in the weeds about all of it, it’s vital to get reliable information from an expert.
How RiversEdge Advisors and Your CPA Help You at Tax Time
RiversEdge Advisors are available to answer questions and help organize your taxes so you can be assured of the best possible results. If your initial estimate of what you owe is overwhelming, it can be reduced in various ways, with declarations, deductions, and tax credits.
If you aren’t currently working with a CPA or are looking for a new one, reach out to us today and we can help connect you with some vetted professionals we enjoy working with.