Tax season has arrived and because of the Covid-19 pandemic, taxes may be more complicated than ever. Due to Paycheck Protection Program loans and stimulus checks, taxpayers may be confused about the filing process and returns, said Galatha Williams, owner of Tax Specialist in Paris.
Williams, who owns three branches of her tax business, said taxpayers may be confused this year about how pandemic-related payouts will affect their taxes, but added that filing with a firm, instead of alone or online, can help alleviate some of the stress.
Williams was quick to quell fears about stimulus payments. For those who did not receive them, they will on their tax return, she said.
“Basically (in) 2020, when they get the stimulus, if you didn’t receive your payment, it’ll be there on your tax return this year,” she said. “So basically, there is a quick question, ‘Did you receive your stimulus in 2020?’ If your answer is no, they’re going to credit you.”
Since stimulus payments were doled out for Americans of a certain income and an extra $600 was added for taxpayers with children, employee Mehleneese Black said if a taxpayer’s family expanded with new children, they will retroactively receive stimulus payments to reflect the new addition to the family, both for the payment in 2020 and the check for 2021. Williams added that the stimulus checks will be counted as credits, so taxpayers need not worry.
However, with PPP loans through the CARES Act, Black said those payments will count toward earned income.
“The biggest thing with the PPP loans and taxes is the fact that they allowed independent contractors and self-employed people to get those loans. So when you got that loan, you’re basically claiming income. You have to claim that income on your taxes, basically, because you were saying that the Covid pandemic impacted you, that you yourself lost income, so that loan was giving you income, so it does need to be claimed on your taxes,” Black said.
The CARES Act also allowed for some exceptions to financial rules, including eliminating the penalty for early withdrawals up to $100,000 from 401(k) and IRA accounts for Americans under the age of 59-and-a-half. Even though those fees were waived, the money withdrawn will still count as taxable income, so taxpayers should be ready to pay more if they made the decision to dip into retirement funds due to the pandemic.
In addition to loans and stimulus payments, Williams said, due to the Covid-19 pandemic, many Americans received unemployment payments which they will now need to pay taxes on — which may come as a shock to some people.
“(With unemployment) you’re not allowed the credits that you would get for actually working for that income,” Black said.
“It’s a double whammy,” Williams said. “If you didn’t pay taxes on it, now, you’ve got to pay taxes on it, and you don’t get a credit for the money that you made. So there’s gonna be a lot of upset people. Basically, this year, people need to walk in their tax preparer’s office expecting a lower refund. Simple as that.”
Williams added that in addition to Covid-related tax complications, the IRS will be performing 50% more audits this year, so taxpayers should prepare themselves for that process. However, she said clients who file through Tax Specialist are offered the option of audit protection so if they do get audited, her business will help them through the process.
“If you do get audited, we will help you through that process step by step,” she said.
Pandemic complications aside, Williams said a key mistake some taxpayers make is declaring an incorrect filing status. There are options for married couples to file jointly and for a taxpayer to declare themselves the “head of household.” She said the head of household status may be confusing for some. Taxpayers are only allowed to declare themselves head of household if they have a dependent, meaning that even if a taxpayer pays all of their own bills or owns their home, if they don’t have children or an adult they care for, they can’t file with that status.
“If they catch you, they will go back (maybe) three years and find out you know how long you’ve been not filing the right filing status,” Williams said.
Black said it’s important that families communicate during tax season, particularly those that have children in their late teens or early twenties who may still live at home but have their own income. Some parents will still claim their children as dependents while those children may want to file separately which could result in problems with the parents’ tax returns.
Williams added that for families with children in that same age group who may be enrolled in higher education, parents can receive educational credits if they are paying out of pocket for the children’s schooling.
“That’s a big one. Don’t forget about the educational credit,” she said.
At the end of the day, Black said she encourages taxpayers to gather all the information they need to file correctly. She said it’s OK for filers to not know all the answers, but they should be wary if their preparer can’t provide them with answers.
“The biggest thing that I try to stress to everyone, when it comes to filing your taxes, is ask questions. Ask your preparers questions,” Black said. “If they can’t answer your questions, you might have a problem.”