What is normally a reliable estimate of your taxes – the amount of money withheld from your paychecks by your employer – may be an unreliable estimate this year thanks to the current pandemic. Even worse, using the safety net of paying in what you did last year may not be practical if your financial situation changed due to the coronavirus.
Many taxpayers wrote a large check to the IRS this year for the very first time to pay a portion of their taxes as the 1st and 2nd quarter estimated tax payments for 2020 were both due on July 15. Because of this it may be beneficial to review whether you need to make a 3rd quarter or 4th quarter estimated tax payment in the coming months.
Here’s how to ensure you are not faced with an unpleasant tax surprise – because either not enough money was withheld from your paychecks for income tax purposes or your estimated tax payments were too small – when you file your 2020 tax return next April.
Step 1: Estimate your 2020 income. Add up your anticipated income for 2020 – W-2 paychecks, unemployment compensation, business income, interest and dividend income and any other form of income.
Step 2: Estimate your 2020 deductions. Add up your anticipated deductions for 2020, including retirement and health savings account contributions, student loan interest you paid and itemized deductions. If you’re not sure, take a look at last year’s tax return and use that figure.
Step 3: Calculate your tax. Subtract your deductions from your income to calculate your taxable income. Then calculate the tax you owe based on your taxable income using the IRS tax tables. Use last year’s table until the new one is published later this year. Here is a link to the IRS publication: IRS tax table
Step 4: Calculate your remaining estimated tax payments. Take the tax calculated in Step 3 and subtract any 1st and/or 2nd quarter estimated tax payments you made, and any paycheck withholdings so far this year. If you owe more than you have paid in or have had withheld so far this year, you have two more quarters to make up the difference through estimated tax payments.
Step 5: Mail your payment to the IRS. The due date to make a 3rd quarter estimated tax payment is September 15, 2020. The 4th quarter deadline is January 15, 2021.
Sound complicated? It definitely can be. If you get stuck trying to figure out if you should make estimated tax payments or have any other questions, please call. Remember, it is better to plan now than to face the unpleasant surprise of an unwanted tax bill on April 15th.
Millions of Americans already received their economic impact payment. But what if you’re still waiting or your payment was for an incorrect amount?
Here are some common scenarios why you may not have received your payment, or the payment you did receive was for an incorrect amount, and what you can do.
Your payment was sent to a closed bank account. If you didn’t update your banking information or mailing address before your payment was processed, your money will probably end up in the wrong location.
What you can do: You probably must wait. If your bank account on file with the IRS is closed or no longer active, the bank will reject the stimulus payment deposit and you will be issued a physical check to the address the IRS has on file for you.
Your check was sent to a wrong address. The IRS will send stimulus checks to the mailing address listed on your most recently-filed tax return. The IRS will also mail a letter with information about how and where the stimulus payment was made, but this letter will go to the most recent address on file.
What you can do: Change your address on file with the IRS by filing Form 8822. While it won’t solve your immediate problem, your change will correct future issues. In the meantime, keep tracking the status of your payment by visiting the website Get My Payment. You can also try and contact the new people who live at your old address.
You didn’t get paid for your dependents or you think your check amount is incorrect. You are certain that you should have received a full $500 payment for each qualifying dependent and the payment was either not received or was for an incorrect amount.
What you can do: If you did not get the full amount you think you should have received, you will be able to claim the additional amount when you file your 2020 tax return.
You received a check for a deceased relative. With more than 300 million people living in the U.S., it probably shouldn’t be a surprise that some of the stimulus checks were mailed to deceased individuals. Unfortunately for living family members, you can’t keep this money.
What you need to do: You should open the check, write VOID on the check and then return it to the IRS. If the payment was via direct deposit or a check received from the IRS was already cashed, you should write a personal check to the IRS to return the money.
Receiving the wrong amount of money in your stimulus check or not receiving a check at all can be very frustrating. But be reassured the IRS is doing everything it can to help you get the correct amount of money that you deserve.
More than 70% of small businesses in America now have loan proceeds from the Paycheck Protection Program (PPP) to help retain employees during the current pandemic. The entire amount of a PPP loan is eligible to be forgiven if the funds are used for qualified expenses. Recent legislation liberalizes the terms of loan forgiveness for funds used for payroll, utilities and rent. It is now based on a 24-week period, not just eight weeks.
But how can you best position your company to fully benefit from PPP loan forgiveness? Here are five tips to help meet the challenge.
Restore your staff. If possible, restore the number of full-time equivalent (FTE) employees to previous levels by the safe-harbor due date of December 31 (extended from June 30). Bring back furloughed FTEs as soon as you can. Of course, this should fit into your overall business plan. If an employee does not return, document the refusal. All these actions will help when the forgiveness formula is applied to your loan.
Pile on payroll costs. Run payroll and other remaining qualified expenses—including mortgage interest, rent and utilities—on the last day of the 24-week period. This will enable your business to maximize the amount of loan forgiveness allowed under the calculation.
Reward employees. Consider paying out reasonable incentive amounts to maximize the forgiveness of payroll costs. The bonuses can even go to family members like your spouse or children. But remember that you can only count up to $100,000 of wages per person, pro-rated for the covered year, and you must be able to defend these payments as reasonable.
Use the simplified application form. There are two loan forgiveness forms – the regular form (Form 3508) and a simplified version called Form 3508EZ. Review both forms before deciding which one is right for your situation. For instance, there are fewer calculations on the simplified form with less documentation required. To qualify for the simplified form, you must meet at least one of these requirements:
You’re self-employed and have no other employees.
You didn’t reduce employee hours or reduce their wages and salaries by more than 25%.
You lost business due to health directives relating to COVID-19 and didn’t reduce employee wages and salaries by more than 25%.
Document everything. Once you receive PPP loan funds, keep supporting documentation on everything related to the loan. Document when you receive the loan, each time you spend part of the loan and accrued interest expense on the loan. Also keep copies of receipts and invoices to document all loan expenditures, including bank account statements and journal entries.
Here are several new tax laws passed this year to consider as you start planning your 2020 tax obligation.
Make up to $300 of charitable contributions. For the 2020 tax year only, an above-the-line deduction of $300 is available to all Americans ($600 for married filing jointly returns) who want to make a charitable contribution. You can donate to more than one charity, but the total amount of contributions must be $300 or less to be able to take an above-the-line deduction. While you will still need to itemize your deductions if you want a tax break for donations greater than $300, this above-the-line deduction for $300 or less helps alleviate the elimination of the charitable deduction for most taxpayers.
What you need to do. Donate $300 to your favorite charitable organization(s) by December 31, 2020. You must receive a written acknowledgment from the charitable organization(s) to which you made the $300 contribution before filing your 2020 tax return.
Donate up to 100% of your income. The normal contribution limit of 60% of your income is suspended for 2020, allowing you to contribute as much of your income as you want to various charities.
What you need to do. While only a tax break for a few taxpayers, this initiative is meant to help struggling charities during the pandemic. If you are considering additional giving, you must make your charitable contributions by December 31, 2020. Remember to obtain written acknowledgment from each charity you made a donation to before filing your 2020 tax return.
Use retirement savings to pay for birth or adoption expenses. Adding a child to your family is very expensive. To help with these costs, you can now cash out up to $5,000 per parent from your retirement accounts to pay for birth and/or adoption expenses. While the withdrawal won’t be hit with the 10% early withdrawal penalty, you’ll still have to pay income taxes.
What you need to do. Consult your financial advisor or benefits coordinator to find out how to withdraw the funds from your retirement accounts. Since this withdrawal will deplete your retirement savings, first consider whether you have other sources of cash to cover expenses.
No age limit for contributing to IRAs. You can now contribute to an IRA regardless of your age as long as you have earned income. The old rule prevented you from contributing to an IRA past age 70½. The IRA contribution limit for 2020 is $6,000 if you’re under age 50 and $7,000 if you’re over age 50.
What you need to do. Consider getting a part-time job or doing some consulting work if you project that you won’t have earned income by the end of 2020. You can then use this earned income to fund your traditional or Roth IRA.
Coronavirus uncertainty abounds. Thankfully, by monitoring tax changes on your behalf, we can work together to navigate the right path for you and your family. Here is a round-up of tax-related laws and information to help with tax planning for 2020.
Early distribution penalty waived The 10% early distribution penalty on up to $100,000 of retirement withdrawals for coronavirus-related reasons is waived during 2020. New tax rules allow tax liabilities on these distributions to be paid over a three-year period. So if you need the funds, you won’t see your tax bill skyrocket in one year. Even better, you can return these distributions back into your retirement account over a three-year period and not be subject to the annual contribution limits. Action: This could be a great way to handle emergency payments until you receive a stimulus check, unemployment payments, or a pending small business loan.
Required minimum distributions (RMDs) waived for 2020 Required minimum distributions (RMDs) in the year 2020 for various retirement plans is suspended. The corresponding 50% penalty associated with not taking an RMD is also suspended in 2020.Action: Taking out distributions when the market takes a tumble can hurt retirement income for many years. This change allows you to wait to let the value in your retirement account rebound before you withdraw funds.
IRS installment agreement suspension The IRS is suspending payments of all amounts due from April 1 through July 15, 2020. If you do not pay your IRS installment payment during this time your installment agreement will not be in default. Interest will continue to accrue on these installment agreements. Action: Being on the bad side of the IRS is never fun. If you currently have an IRS installment agreement, look to take advantage of this delay.
Offers-in-compromise The IRS will allow you until July 15, 2020 to provide additional requested information for any pending offers-in-compromise (OIC) and will not close out the OIC during this time without your consent. The IRS is also suspending any payments due under an OIC until July 15, 2020.
Enforcement activities suspended? Not so fast…The filing and enforcement of liens and levies will generally be suspended. However, IRS Revenue Officers will continue to pursue high income non-filers and initiate other actions when warranted.
No new audits The IRS will not initiate new audits during this time, but will act to protect the statute of limitations.
For many folks, the lyrics of a 1960s rock song summarize the American dream: “Our house is a very, very, very fine house.” According to U.S. Census figures, about two-thirds of American families are homeowners.
But buying a house or condo may not be the best choice for every family in every situation. Renting offers the following advantages:
Greater flexibility. When renting a house, apartment, or condo, you have the option of moving at the end of the lease term. No need to contact a realtor, no hassle with buying or selling. For those who want to keep their options open, especially in terms of job location or dwelling size, renting may prove the better choice.
Opportunities to invest elsewhere. Instead of plowing your savings into a home, you might get a better return by contributing to mutual funds or other investments. Depending on the housing market in your city, the annual increase in your home’s value may barely outpace inflation.
Lower cost. Apartments are often smaller than homes, so heating and cooling expenses tend to be lower. If you don’t have a lawn, you won’t incur the cost of water to keep it green. Roof leaking? Appliances on the blink? Call the landlord. Home repair and maintenance aren’t normally your responsibilities.
Of course, as many realtors and financial analysts rightly point out, homeowners also enjoy significant advantages:
Greater flexibility. Ironically, homeowners enjoy certain freedoms denied to renters. If a homeowner wants to paint a wall or hang a picture, he or she doesn’t answer to a landlord. Installing a doggy door isn’t a problem. Hiring a remodel contractor to tear out a wall is perfectly acceptable. Don’t try this if you’re a renter.
Increasing equity. One of the greatest advantages to buying a home is the likelihood of increased equity over time. As long as your mortgage is being whittled down by monthly payments, you’re building equity—even if your property value remains stable.
Lower taxes. The ability to deduct mortgage interest and property taxes (if you itemize) can significantly lower your end-of-year tax bill. Renters must forgo this benefit.
Clearly, the choice to rent or buy a home depends on individual circumstances and tastes. If you’d like help with this important decision, give us a call.