Navigating the tax implications of the COVID-19 pandemic
Navigating the tax implications of the COVID-19 pandemic
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As a senior lecturer in accounting, a certified public accountant and an expert with experience working in public accounting, Stephanie Lewis knows all about tax season.
With the disruption caused by the coronavirus (COVID-19) pandemic, Lewis provides some insights into the unprecedented nature of the filing day delay as well as some thoughts on the stimulus checks many Americans are receiving.
How unique/unprecedented is a three-month delay in tax filing day?
April 15 became “Tax Day” in 1955, and this is the first time the Internal Revenue Service (IRS) has moved the official filing date. Individuals always have the option to apply for an automatic six-month extension to file their tax returns, so giving people extra time to file is nothing new. What is unique about this is that unlike automatic extensions, this year taxpayers can also delay paying their tax liability until July 15. The payment extension also applies to any first- and second-quarter estimated tax payments that would normally be due when the income tax return is filed. Taxpayers who need additional time to file (but not pay) can apply for a three-month extension by July 15.
Who stands to be impacted most by this delay? Individuals? Companies? Corporations?
Original guidance issued by the IRS extended the due date for income tax returns of individuals and entities with an April 15 due date, as well as first-quarter estimated tax payments due on April 15, to July 15. This meant that corporations and trusts could also take advantage of the extension. The IRS recently announced that the extended filing/payment date is also extended for second-quarter estimated tax payments (normally due on June 15), estate tax returns and partnership income tax returns (normally due on March 15).
The extension of time to file first- and second-quarter estimated payments will have a huge impact on corporations and sole-proprietors/self-employed individuals. Corporations and individuals who aren’t subject to tax withholding are typically required to pay an estimate of the tax they owe for the current tax year in four quarterly installments, with the first two being due on April 15 and June 15. The objective of these payments is for the taxpayer to pay pretty close to what they owe in tax throughout the year, leaving little tax liability due when they actually file their tax return. The extended due date for estimated payments allows corporations and certain individuals to pay half of their tax liability for the 2020 tax year by July 15.
Will individuals/companies/corporations see the impact of this delay in the short term? Long term? If so, how?
Corporations and certain individuals will have increased cash flows in the short-term, since the 2019 tax liability and first two quarterly estimated payments for 2020 are due July 15.
Should individuals be doing anything differently between now and filing day?
For individuals who will owe tax when they file their tax return, this is a good opportunity to have your return prepared now and budget for the payment of that tax over the next three months.
From a tax revenue perspective, can you speak to the impact that the mass layoffs and increase in unemployment will have?
When people are unemployed and not earning wages, the government not only loses out on income tax revenue, but also revenue from payroll taxes such as Social Security and Medicare. If the government doesn’t reduce spending, it has to borrow money to compensate for the lost tax revenue, essentially deferring some of the cost of unemployment to the future.
Unemployment creates additional burdens on the federal and state governments through the additional costs of unemployment compensation and other benefits such as food assistance and Medicaid. State and local governments that impose an income tax are also affected.
Any other major lessons/insights/impacts you’d like to share about this situation?
The CARES Act also provides for Economic Impact Payments for eligible individuals and families. The payment amount is $1,200 for individuals ($2,400 for married couples filing a joint tax return). Individuals with adjusted gross income (AGI) under $75,000 ($150,000 for married couples) qualify to receive the full amount. Taxpayers with AGI higher than these thresholds may qualify for a partial payment; individuals with AGI over $99,000 ($198,000 married) don’t qualify at all. Qualified individuals will also receive an additional $500 for each dependent child younger than 17 years old.
The payment amounts will initially be based on taxpayers’ 2019 tax return (or 2018, if they haven’t yet filed their 2019 taxes). Those who didn’t file in either year, including Social Security recipients eligible for the $500 dependent child credit, may apply to receive the payment on the IRS’ website. Other Social Security recipients will receive their check automatically. Those taxpayers who elected direct deposit for income tax refunds have already started to receive payments direct deposited into their bank accounts. Those who didn’t elect for direct deposit will receive a check in the mail.
The good news is these payments aren’t taxable, and the IRS won’t hold a payment for delinquent taxes or for those taxpayers who have installment agreements with the IRS for prior years taxes. A payment could be reduced (or forfeited entirely) for those individuals with past-due child support.
Another benefit of the CARES Act for unemployed individuals is a $600 a week bonus (through July 31) for those taxpayers who are registered as unemployed. This is in addition to standard unemployment payments, which vary by state and a person’s earnings.
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