With a historic 2020 now behind us, millions of Americans are wondering or worrying about the lasting effects of COVID-19 on our economy.
This certainly includes the tax codes as both individuals and small businesses begin to file their taxes. Many are unsure of the impact programs like stimulus checks, unemployment benefits and Paycheck Protection Loans will have on their taxes.
It needs to be said clearly that while these are all points to consider and good to know, they are for informational purposes only. You should always check everything with your accountant or tax professional, as they best know you and your situation.
Donna Walton, Wealth Strategist at TD Wealth, walked us through what's different for 2021, especially since some emergency changes from 2020 have either expired or been adjusted.
"The average person or business owner may not know this essential information and it's important to be aware of these changes to potentially avoid pitfalls," Walton said.
Paycheck Protection Program (PPP) Loan Forgiveness
Walton says that if your business is eligible for PPP loan forgiveness, then the income from the PPP loan is exempt from federal taxes. "Most loan forgiveness is taxable, but PPP loan forgiveness is not taxable on the federal level."
In fact, Walton says part of the legislation late last year and early this year was to clarify this point.
However, not every state has adopted this federal exemption. In states like New York or Connecticut, income derived from forgivable PPP loans are not taxable on the federal level, but in other states like Florida and North Carolina, this income may be subject to taxation.
"Those are not taxable," Walton says.
The stimulus checks are not taxable and do not need to be reported as income. They are considered a rebate of a tax credit and are called the recovery rebate credit.
Millions of Americans lost their jobs due to the pandemic and economic shutdowns that occurred last year in order to combat the spread of the virus.
Unemployment benefits up to $10,200 are untaxable at the federal level for those with an adjusted gross income less than $150,000. Those benefits would double for a married couple if both members of the household were eligible for unemployment last year.
But as with PPP Loans, not all states may conform to this, and some states may tax unemployment benefits.
Retirement Benefits and Early Distributions
Many Americans also had to pull from their 401(K) plans last year, before the age of 59.5, when penalties for doing so are eliminated.
Last year, the 10% penalty in withdrawing from your 401(K) before you're that age of 59.5 was waived. Individuals could take up to $100,000 from their 401(K) without penalty.
"But those changes are not permanent," Walton said. "They extended the time you have to repay those withdrawals (3 years) but those withdrawals had to be made last year."
Required Minimum Distribution
Last year, regarding retirement accounts, the required minimum distribution for many retirees was waived.
This was most beneficial for those who didn't need to take the distribution.
Child Tax Credit and Other Changes
There are a lot of other changes to this year's tax code, like a higher standard deduction, changes to the earned income tax credit and more.
The Child Tax Credit was also increased for 2021 and that increase was extended for 12 more months.