About 90% of Americans can agree on one thing. That one thing is that the tax code it too complicated to understand. That survey was taken in 2017, before the Tax Cuts and Jobs Act and COVID-19.
If you want to be ready for tax season, you better start planning now. You could be caught off-guard by having to pay more taxes than you expected.
You need to get the most current tax advice to make sure that you are doing everything you can to pay enough taxes during the year. Keep reading to find out what’s changed this year and how you can be ready for tax season.
Standard Deduction Increases
Before COVID-19 rocked the world, one of the changes the IRS announced for the 2020 tax year is that the standard deductions across tax brackets will be increased slightly over 2019. The income amounts for each tax bracket were also adjusted for inflation.
For example, if you’re filing as a single taxpayer or married filing separately, your standard deduction will be $12,400. For married filing jointly, your deduction is $24,800.
PPP Loans and Taxes
Were you impacted by the economic downturn due to COVID-19? Congress stepped up to provide some relief to help companies keep people employed through the CARES Act.
A major part of this legislation is the Payroll Protection Program Loan or PPP Loan. Self-employed people, freelancers, and companies of up to 500 employees were eligible to take out a loan.
At first, companies who spent 75% of the loan in 8 weeks on payroll expenses could have the loan forgiven. Then the threshold was lowered to 65% and people who got their loan after June 8, 2020, could use the loan in 24 weeks.
How would a PPP loan impact your taxes? There are two ways that a PPP loan could affect your taxes. The first is that the forgiven part of the loan doesn’t count as income by the IRS.
However, the IRS did rule that business expenses that you would normally deduct that were paid for by the PPP loan cannot be deducted on your tax returns. The IRS considers that to be double-dipping, and the only way to change that ruling is through an act of Congress.
EIDL Grants and Taxes
Another form of economic relief that was approved through the CARES Act was to extend the SBA’s Economic Injury and Disaster Loan (EIDL) program to apply to those impacted by Coronavirus. These loans usually are reserved for businesses that were impacted by floods and other natural disasters.
The EIDL is available to small businesses and self-employed individuals. One of the selling points of this loan wasn’t loan forgiveness, but the loan advance that came in the form of the grant.
You could get a $1,000 grant within days for every employee in your business up to $10,000. For example, if you have 3 employees, you’d qualify for a $3,000 grant. Self-employed people would get a $1,000 grant.
The caveat of that grant is that the IRS considers it to be income, so you’d have to pay taxes on the amount of money granted to your business since it’s business income. You can still deduct the expenses that were paid for by the loan, so this could still be an advantage for your business.
Payroll Tax Cuts
President Trump authorized the ability for businesses to elect to take a payroll tax cut starting on September 1, 2020. If a business did elect to take this opportunity, they can defer 6.2% of payroll taxes. Some employees may be able to have 6.2% added to their paychecks, too.
However, this isn’t a type of tax forgiveness. Only Congress can do that. This is just a deferment through the end of the year.
You and your employees would still have to owe that money next year. This could add up to a larger tax bill and more money is taken out of your employee’s paychecks when they least expect it.
How to File Taxes
Now that you understand the changes this year, how can you make sure that you’re ready to file your tax return? Start by planning now.
You want to make sure that you’re paying enough taxes during the year. You’ll have to pay estimated taxes every quarter if you will owe more than $1,000 to the IRS. You can figure out how much you owe based on your previous year’s return. If your income dipped this year, you can use your profit and loss statements as a guideline.
You’ll also need to get your documentation together and keep records of everything. If you got a PPP or EIDL loan, you need to make sure you can track what those loans paid for.
One major change that’s related to documentation has to do with the 1099-MISC forms that are sent to independent contractors. These forms are no longer in use as of 2020. Instead, you’re supposed to use the 1099-NEC form, which is being revived by the IRS.
Work with a Tax Professional
If you’ve relied on doing taxes yourself over the last several years, this is the year where you want to reconsider your stance. Since tax returns are bound to be incredibly complicated this year, you’ll want to hire a tax professional.
You can expect tax rules to change between now and Tax Day 2021. It’s incredibly important to stay up to date on all of the tax changes.
Tax Advice for a Long, Strange Year
The year 2020 will be remembered for many things: unexpected losses, a global pandemic, economic crises, and a major push towards lasting social and systemic changes.
There are more changes in-store when you do your tax returns. The tax advice presented here is to get you to start thinking about your taxes and how you can be prepared. Your best bet to make sure you have everything in order is to consult with a tax professional.
For more ways to be financially sound, be sure to visit the Finance section of this site.