Let’s Turn Over the Last Stone Before 2020 Ends!
Three – Two – One
Happy New Year!
{5 minutes to read} In just a few hours America will be joining many other nations as we welcome 2021 and echo the words above. Twenty-twenty — what a year! A year that will forever remain in plain view many years after it has passed. May you and I choose to glean from the lessons learned — and use them as a contribution to a better good for all.
Moving along — The long-awaited Coronavirus Relief Bill was passed on December 21, 2020. There is a plethora of provisions for individuals and businesses. Some individuals could see another $600 check, while businesses could get more money to pay their employees (including Schedule C earners) from the second funding of a PPP loan. The Tax Foundation provided a list of various provisions that are part of the $900 Billion Coronavirus Relief Bill.
IMPLICATIONS OF UNDER-PAYMENT OF TAXES (Mitigate the effect by acting before January 15, 2021)
In recent years, both the IRS and the state taxing agencies have been more rigid in their enforcement of penalties related to underpayment of taxes. According to the IRS, the United States income tax system is a pay-as-you-go tax system — taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, and/or prizes and awards, you may have to make estimated tax payments.
Generally, for most tax agencies, taxpayers may avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller, is paid through withholding and estimated tax.
While most of us are already familiar with this requirement, the pandemic and remote working could create a greater concern with state tax liabilities. Keep in mind that most states collect tax on money that is earned within their borders. Though there is some semblance of unity among some states, each state wants a piece of the tax pie. Multi-states reporting could be triggered by remote working that was and continues to be, necessary due to the pandemic.
For an employee — the state or tax jurisdiction is handled by your employer and is reflected on your pay-stub and W-2. Please check directly with your employer regarding your taxing jurisdiction. If there are permanent changes in address, it is the employee’s responsibility to inform their employer.
Word of caution to individuals who have “temporarily” moved to a different state for working remotely due to the pandemic: These individuals may still have tax obligations to their state of primary residence (home state); some states are taking a closer look at individuals who temporarily moved from their primary home.
However, Johnny is an NYS resident, and during the pandemic (as of April 1st) he moved to Florida and has not returned to NYS, so it would be fair to say that Johnny is a resident of FL from April – Dec 2020 where there is no state tax. NYS, however, would see this differently and will consider Johnny a resident for all 12 months. As such, Johnny would have a tax obligation to NYS for the full year.
Other areas where underpayment of taxes may show up – A vast majority of us received income from multiple sources other than our regular earned income source in 2020; here are two (2) income sources that seem to be more common in 2020:
- Unemployment income — Most states withhold 10% of the income for federal taxes. This is often not enough since an individual may not be in a 10% tax bracket when all income is combined.
- Withdrawal of retirement savings — including those related to CARES Act. The early withdrawal penalty may be waived, but the tax is still due.
So considering we are exiting 2020 — is there still time to mitigate the penalty on the 2020 tax liability?
Yes. The taxing authorities allow most taxpayers to pay their final 2020 estimated tax by January 15, 2021 (must be received by this date).
Please reach out if you would like to schedule an estimated tax consultation next week.
In closing, as I listen to babblings with words like “I can’t wait to say goodbye to 2020,” I trust that we will remember the words of Walt Disney, “…the past can hurt. But the way I see it, you can either run from it or learn from it.”
Which one will serve you (and me) better, running from it or learning from it? Let’s choose wisely.
With gratitude,
Nadine.
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com
The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.