By Lisa Bakewell
NOTE: This article was not written by a tax professional. ABMP does not intend the information in this article to be official tax advice. Please consult a certified tax preparer regarding the material in this article to determine whether it is applicable to your situation.
Keep in mind, the information in this article was current as of January 6, 2022. Since COVID-19 relief efforts are fluid, please check with IRS.gov for up-to-the-minute information.
As a result of COVID-19, you most likely encountered changes to your 2020 tax bill, and it’s likely you’ll encounter a few more for 2021.
As a business owner, you may have applied for—and received—a Paycheck Protection Program (PPP) loan and/or an Employee Retention Credit. As an employee, you may have been laid off and collected unemployment. Or, you may be a self-employed, freelance, or contract worker who qualified—for the first time ever—for unemployment. Not only that, but you may have received stimulus monies, dipped into retirement savings to bridge the income gap, or begun working in the gig community. As a result of these events, plus annual inflation tweaks and a few new rules, you may find you’re subject to new tax ramifications. So, what does all of this mean for you? Let’s find out!
Will My Stimulus Money Be Taxed?
No. Uncle Sam does not consider stimulus money taxable income. Instead, the Internal Revenue Service (IRS) considers this money a refundable tax credit, which “is not includible in your gross income.”1 Therefore, you will not include the Economic Impact Payment (as the IRS calls it) as taxable income on your Federal income tax return, and you will not pay income tax on it. Also, your stimulus money will not reduce your refund or increase the amount you owe when you file your tax return, and it “will not affect your income for purposes of determining eligibility for federal government assistance or benefit programs.”2
What If I’m Missing a Stimulus Payment?
If you didn’t receive stimulus money and you’re eligible, you can claim the Recovery Rebate Credit on your Form 1040 or 1040-SR. These forms can also be used by people who are not normally required to file tax returns but are eligible for the credit. The Recovery Rebate Credit, authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, will increase the amount of your refund or lower the amount of the tax you owe.3 The IRS warns, though, that you should not include amounts of missing first or second stimulus payments on your 2021 tax return. Instead, see “How to Claim the 2020 Recovery Rebate Credit” at www.irs.gov/newsroom/recovery-rebate-credit.
I Collected Unemployment Due to COVID. Will That Money be Taxed?
Typically, any unemployment income received is considered taxable income, including unemployment income collected from the Pandemic Unemployment Assistance program, which offered unemployment compensation to freelancers, contractors, and the self-employed for the first time ever. (Note: On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which excluded up to $10,200 in unemployment compensation, per taxpayer, paid in 2020.4 For those who collected benefits and filed their taxes prior to March 11, the IRS began sending refunds in June 2021 to correct overpayments and avoid amended returns. Taxpayers should have received letters from the IRS informing them of the kind of adjustment made—a refund, payment of IRS debt payment, or payment offset for other authorized debts—and the amount of the adjustment.5)
Note: There are possible unemployment extensions for independent contractors.
The CARES Act gives states the option of extending unemployment compensation to independent contractors and other workers who are ordinarily ineligible for unemployment benefits. For more information, visit www.dol.gov/coronavirus/unemployment-insurance#find-state-unemployment-insurance-contacts.
Additional Tax Changes
Here are some other non-COVID changes:6
• The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
• The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
• The Alternative Minimum Tax exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200). The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).
• Marginal Rates: For tax year 2021, the top tax rate remains 37 percent for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are: 35 percent, for incomes over $209,425 ($418,850 for married couples filing jointly); 32 percent for incomes over $164,925 ($329,850 for married couples filing jointly); 24 percent for incomes over $86,375 ($172,750 for married couples filing jointly); 22 percent for incomes over $40,525 ($81,050 for married couples filing jointly); and 12 percent for incomes over $9,950 ($19,900 for married couples filing jointly). The lowest rate is 10 percent for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
• The annual exclusion for gifts is $15,000 for calendar year 2021, as it was for calendar year 2020.
• For 2021, as in 2020, 2019, and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
Coming up next:
Lisa Bakewell is a full-time freelance writer and editor. Her areas of writing expertise span a multitude of topics. She can be reached at email@example.com.
1. IRS, “First Economic Impact Payment Questions and Answers—Topic J: Reconciling on Your 2020 Tax Return,” updated April 15, 2021, www.irs.gov/newsroom/economic-impact-payment-information-center-topic-j-reconciling-on-your-2020-tax-return.
2. IRS, “First Economic Impact Payment Questions and Answers—Topic J: Reconciling on Your 2020 Tax Return.”
3. IRS, “Recovery Rebate Credit,” updated December 14, 2021, www.irs.gov/newsroom/recovery-rebate-credit.
4. IRS, “IRS Sending More than 2.8 Million Refunds to Those Who Already Paid Taxes on 2020 Unemployment Compensation,” updated November 1, 2021, www.irs.gov/newsroom/irs-sending-more-than-2-point-8-million-refunds-to-those-who-already-paid-taxes-on-2020-unemployment-compensation.
5. IRS, “IRS Sending More than 2.8 Million Refunds to Those Who Already Paid Taxes on 2020 Unemployment Compensation.”
6. IRS, “IRS Provides Tax Inflation Adjustments for Tax Year 2021,” updated May 17, 2021, www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021.