Navigating the Unique Tax Policies and Opportunities of 2020 and 2021

Apr 22, 2021

Each of the different relief bills passed during the COVID-19 pandemic have included tax implications. As the May 17 deadline to file approaches, some individuals and sole proprietors are encountering these policies, many of which are new and temporary, for the first time.

I was recently interviewed by FOX 61 News about what’s different with taxes this year. I’ve included more details on key points below.

Deadline extension

This year, the federal income tax filing due date for individuals for the 2020 tax year was automatically extended from April 15 to May 17. Please note this is only for individual income tax returns.

More importantly, individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15 to May 17 without penalties and interest, regardless of the amount owed. It is important to note that this postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17.

Most tax refunds associated with e-filed returns are issued within 21 days.

For the self-employed, first quarter estimated tax payments were due on April 15.

Employee retention credit

We’ve all heard plenty about PPP loans in the news over the last year, but something that deserves more attention is the overlooked employee retention credit for businesses. The credit has to be processed through a payroll service provider, and some of them haven’t been as diligent as they could be in providing this information to their clients.

Under the CARES Act, the Employee Retention Credit (ERC) is a refundable tax credit for eligible employers against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Thus, the maximum ERC amount available is $5,000 per employee.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the ERC for six months through June 30, 2021. As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020 through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

For more on the employee retention credit, view FML’s recent webinar.

Now this is interesting

Many businesses are still struggling as restrictions are being lifted and the recovery gains momentum. Therefore, understanding how to allocate your cash flow in your business operation is extremely important during this recovery period.

For example, as Q2 income tax estimates deadline is approaching, you may want to understand the underpayment interest that IRS and DRS is using to help you decide which to pay first. The federal interest rate is currently running at 3 percent. However, the interest rates on state taxes are often in the double digits.

It may make sense for some businesses to pay estimated taxes to state jurisdictions on time and essentially take a low-interest loan from the federal government.

In addition, the CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals and to defer payment of certain self-employment taxes without interest or penalty.

The repayment of the deferral amount is split equally between 2021 and 2022. The first repayment must be made by December 31, 2021 and the second repayment is due December 31, 2022.

Are you kidding?

In one version of my FOX 61 interview, I was quoted discussing the child tax credit.

Here are some numbers to know before claiming the child tax credit or the credit for other dependents.

  • $2,000: The maximum amount of the child tax credit per qualifying child.
  • $1,400: The maximum amount of the child tax credit per qualifying child that can be refunded even if the taxpayer owes no tax.
  • $500: The maximum amount of the credit for other dependents for each qualifying dependent who isn’t eligible to be claimed for the child tax credit. This can include dependents over the age of 16 and dependents who don’t have the required SSN.
  • $400,000: The amount of adjusted gross income for taxpayers who are married taxpayers filing a joint return before the credit is reduced.
  • $200,000: The amount of adjusted gross income for all other taxpayers before the credit is reduced.

Let me give you a quick example: If you have zero tax liability due on your individual income tax return and have one qualifying child, you could still claim that credit and receive a $1,400 cash refundable credit. This is particularly noteworthy for individuals who had lower income (and at least $2,500 of earned income) this year and may not owe taxes.

Lastly, thanks to the $1.9 trillion American Rescue Plan Act of 2021, the child tax credit has temporarily been increased from $2,000 to $3,000 per child ($3,600 for children ages 5 and under) for the 2021 tax year. This act also provides “child allowance” payments to qualifying families from July to December. The allowance is half the total credit amount paid in advance and the other half will be claimed on the tax return that you’ll file next year. This part of the plan is complicated and there will be more guidance to come.

Stimulus check

Finally, if you didn’t get a first and second Economic Impact Payment or got less than the full amounts, you may be eligible to claim the 2020 Recovery Rebate Credit. To claim the rebate credit, you must file a 2020 tax return even if you don’t usually file a tax return.