Looking ahead to tax season: Some tips to remember during the COVID-19 pandemic

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GREENSBORO, N.C. (WGHP) — At the end of the year, many of us begin to gather our records and organize our files for tax preparation.

The Internal Revenue Service’s rules often change as laws are passed, and the COVID-19 pandemic–and its two relief acts–likely will have a continuing effect on some elements of your tax filing.

The IRS has much guidance on many pages of frequently asked questions about COVID-19’s role in taxes. Some of those deal with business owners or employers and requirements related to business returns.

But most of us are just little old individuals executing our civic duty. Here are a few things you might have been wondering:

Do I have to pay taxes on the 2021 stimulus payments I received?

Just like 2020, those are technically refundable tax credits, so you don’t have to report the dollars on your tax return.

Do I have to pay taxes on the child tax credit payments I’ve been receiving?

You will have to claim the last half of those monthly payments on your return (the rest are considered an “advance payment”). The IRS says that “families who received advance payments will need to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return.”

I lost my job because of COVID-19. Do I have to pay taxes on unemployment payments?

The IRS taxes unemployment compensation, but the American Rescue Plan Act of 2021 allows an exclusion of up to $10,200 per taxpayer or $10,200 per spouse for married couples, as long as the adjusted gross income is less than $150,000 for individual and $300,000 for couples. You will have to pay taxes on any amount over $10,200 per person no matter your income level.

Does the IRS consider COVID-19 to be a federal disaster that allows for special tax benefits?

Not for most of us. The IRS recognizes only disasters as identified by FEMA (think of Kentucky’s recent tornadoes). COVID-19 is not listed for 2021, and North Carolina’s only qualifying disaster is from Tropical Storm Fred (only in Ashe and Watauga counties in this area).

The IRS does extend special tax relief to persons who are designated by the IRS to be “a qualified individual.” To meet that standard:

  • You or your spouse or dependent are diagnosed with the virus COVID-19 by a test created by the Centers for Disease Control and Prevention.
  • You experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced because of COVID-19.
  • You experience adverse financial consequences because of a lack of child care.
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate because of COVID-19.

What are some ways that COVID-19 relief affects my retirement plan withdrawals?

Qualified individuals can take virus-related distributions, and they can get larger loans and longer repayment schedules from those retirement accounts, including 401(k), IRA and pension plans. There are some variances based on the type of plan.

Will I be taxed if I take money from my retirement account?

The CARES Act allows for “favorable tax treatment” for up to $100,000 of coronavirus-related distributions from eligible retirement plans, including 401(k) and IRA for qualified individuals. This also may extend to special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

I retired from my job and started to receive retirement benefits. Then my company rehired me because of COVID-19. Does that change my retirement status?

The IRS says generally the answer is no. Retirement benefits only can be paid when an individual has a bona fide retirement as determined by a q/a process created by the IRS. Unless there is some pre-arrangement for rehire, the retirement status does not change. If a retirement plan terms permit, benefit distributions could continue after the rehire.

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