by | Feb 11, 2021 | Tax Tips and News
Taxpayers may be aware that the Families First Coronavirus Response Act (FFCRA) includes a refundable tax credit for eligible employers who provide COVID-related sick and family leave. What some might not know is that this credit is also available for self-employed individuals, and a new form from the Internal Revenue Service makes claiming it straightforward.
What form should self-employed individuals use to claim FFCRA sick leave and family leave tax credits?
The IRS this week announced that Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, is now available for download on IRS.gov. In addition to completing Form 7202, the agency notes that eligible self-employed individuals will need to make sure they claim the credit on the appropriate Form 1040:
- 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020
- 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021
When calculating the amount of the sick leave or family leave tax credit, the IRS suggests checking out sections 61 and 63 under “Special Issues for Employees” on IRS.gov.
Which self-employed individuals can claim the FFCRA sick and family leave tax credit?
The IRS says that self-employed individuals must have documentation showing that COVID-19 caused them to be “unable to work or telework for reasons relating to their own health or to care for a family member.” And the Department of Labor lists these six reasons that employees, in general, can qualify for FFCRA paid sick leave:
- is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine related to COVID-19;
- is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
- is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19; or
- is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Self-employed individuals will also need to confirm that their trade or business “qualifies as self-employment income” and that they are “eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act as if [they were] an employee.”
For more information about Form 7202 and other coronavirus tax relief, check out these IRS resources:
Source: IR-2021-31
– Story provided by TaxingSubjects.com
by | Feb 9, 2021 | Tax Tips and News
The Internal Revenue Service is reminding taxpayers that the best tax professionals are those who always sign the returns they’ve prepared. These so-called “ghost preparers” refuse to sign the returns they prepare—whether physically or digitally—getting the taxpayer to sign the return while the preparer remains anonymous.
The IRS notes that, regardless of who prepares the return, taxpayers are “ultimately responsible for [the accuracy of their tax return].” In addition to possible issues with accuracy, these ghost preparers can present an identity theft and tax refund fraud risk.
It’s the law
By law, anyone who is paid to prepare—or assists in preparing—federal tax returns must have a valid Preparer Tax Identification Number, or PTIN. Paid preparers must sign and include their PTIN on the return.
Not signing a return could be a red flag of questionable behavior, including promises of a big refund and charging fees based on the size of the taxpayer’s refund.
The IRS says taxpayers should also avoid using tax preparers who:
- Require payment in cash only and do not provide a receipt.
- Invent income to qualify their clients for tax credits.
- Claim fake deductions to boost the size of the refund.
- Direct refunds into their bank account, not the taxpayer’s account.
Homework pays off
The IRS urges taxpayers to choose their tax professional wisely. The Choosing a Tax Professional page on IRS.gov has information about tax preparer credentials and qualifications.
The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help identify many preparers by the type of their credentials or qualifications.
No matter who prepares the return, the IRS says taxpayers should review it carefully and ask questions about anything that’s not clear before signing. They should also verify both their routing and bank account numbers on the completed return with a direct deposit refund.
Taxpayers should also watch out for preparers who put their own bank account information onto their return instead of the taxpayer’s.
Source: IR-2021-30
– Story provided by TaxingSubjects.com
by | Feb 7, 2021 | Tax Tips and News
Since the coronavirus pandemic began, we’ve heard a lot about front-line health care workers and their risks. Now, we’ve come to know that teachers face risks of their own.
To help mitigate those risks, eligible educators can now deduct their unreimbursed expenses for personal protective equipment (PPE) to help stop the spread of the virus in the classroom.
Rev. Proc. 2021-15 provides guidance for educators on their expenses under the COVID-related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021.
The new law clarifies that unreimbursed expenses paid or incurred after March 12, 2020, by eligible educators for protective items to stop the spread of COVID-19 qualify for the educator expense deduction.
Covered COVID-19 protective items include, but are not limited to:
- face masks;
- disinfectant for use against COVID-19;
- hand soap;
- hand sanitizer;
- disposable gloves;
- tape, paint or chalk to guide social distancing;
- physical barriers (for example, clear plexiglass);
- air purifiers; and
- other items recommended by the Centers for Disease Control and Prevention (CDC) to be used for the prevention of the spread of COVID-19.
Educator expense deduction rules permit eligible educators to deduct up to $250 of their qualified expenses per year. The deduction rises to $500 if both spouses are eligible educators and they file married filing jointly. In either case, the deduction is limited to $250 each.
Eligible educators include anyone who is a kindergarten through grade-12 teacher, instructor, counselor, principal or aide in a school for at least 900 hours during a school year.
This deduction is for expenses paid or incurred during the tax year. Taxpayers can claim the deduction on Form 1040, Form 1040-SR, or Form 1040-NR (attach Schedule 1 (Form 1040).
For more information on the deduction for expenses of an eligible educator, see the Instructions for Form 1040 and Form 1040-SR, or the Instructions for Form 1040-NR.
Details on this provision, the Tax Relief Act of 2020 and other tax changes can be found on the IRS website, IRS.gov.
– Story provided by TaxingSubjects.com
by | Feb 5, 2021 | Tax Tips and News
Thanks to recent legislation, U.S. corporations can deduct up to 100% of their contributions to relief effort for a qualified disaster. They are also getting a break on how they have to document it.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) temporarily increased the limit for corporate contributions paid in cash for relief efforts in qualified disaster areas—up to 100% of a corporation’s taxable income.
What qualifies?
The new law specifies qualified disaster areas are those where a major disaster has been declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
It should be noted that any disaster declaration relating to COVID-19 is not covered.
Otherwise, it includes any major disaster declaration made by the President between Jan. 1, 2020, and Feb. 25, 2021, as long as it is for an event specified by the Federal Emergency Management Agency as beginning after Dec. 27, 2019, and no later than Dec. 27, 2020.
FEMA.gov has a list of disaster declarations.
To qualify, contributions must be paid by the corporation in the period beginning Jan. 1, 2020, and ending Feb. 25, 2021. Cash contributions to most charitable organizations qualify for the increased deduction limit. However, contributions made to a supporting organization or to establish or maintain a donor-advised fund do not.
Doing the math
A corporation chooses to take advantage of the increased limit by calculating its deductible amount of qualified contributions using the increased limit and claiming the amount on a tax return for the tax year the contribution was made.
Usual record-keeping steps apply to the deduction. Qualifying corporations have to obtain a contemporaneous written acknowledgment (CWA) from the charity. The corporation has to get its CWA before filing its return; but it has to be obtained no later than the return’s due date—including extensions.
The TCDTRA of 2020 added a new twist to this process with a new requirement.
Corporations taking advantage of the increased limit have to include a disaster relief statement to their CWA. The statement should state that the contribution was used—or is to be used—by the eligible charity for relief efforts in one or more qualified disaster areas.
Because the new requirement came along in late 2020, the IRS says it recognizes that some corporations may have gotten a CWA that lacks a disaster relief statement.
Therefore the IRS won’t challenge a corporation’s deduction of any qualified contribution made before Feb. 1, 2021, solely on the grounds that the corporation’s CWA doesn’t include a disaster relief statement.
For more information on documenting gifts to charity, see Publication 526, Charitable Contributions, available on IRS.gov.
Source: IR-2021-27
– Story provided by TaxingSubjects.com
by | Feb 4, 2021 | Tax Tips and News
The nation has been weathering nearly one million weekly initial unemployment claims since the beginning of the pandemic. For many qualifying Americans, unemployment insurance benefits are the only thing preventing food insecurity and homelessness while trying to find a new job. Unfortunately, some still have not received their benefits.
The Internal Revenue Service warns that identity thieves have been targeting unemployment benefits, using stolen personally identifiable information to swipe the much-needed payments. Compounding the problem of not receiving unemployment compensation, those benefits are taxable—and issuing state won’t know the money hasn’t been received unless taxpayers notify them.
How do I know that my unemployment benefits have been stolen?
Receiving Form 1099-G, Certain Government Payments, for unemployment benefits that have not arrived in the mail or been deposited in a designated bank account can be a sign that you are the victim of identity theft unemployment benefits fraud.
What should I do if I receive a Form 1099-G for unemployment benefits I didn’t receive?
Getting an incorrect Form 1099-G for unemployment requires immediate action from the beneficiary. Whether a first-time recipient or having previously received unemployment compensation, affected taxpayers might not know what to do. So, we asked Drake Software Chief Compliance Officer Suzanne Vanderpool to explain a common misconception for reporting an incorrect Form 1099-G and identity theft unemployment fraud.
“I am concerned there will be confusion on how to report the identity theft associated with unemployment benefits,” Vanderpool says. “Unlike identity theft of a taxpayer’s e-filed returns, taxpayers do not need to file a Form 14039, Identity Theft Affidavit with the IRS. Unemployment benefits are issued by the states, and the taxpayer must request a corrected Form 1099-G from the state reporting the income.”
Since hundreds of thousands of Americans continue to file unemployment claims every week, it’s possible that some will receive an incorrect Form 1099-G too close to the tax filing deadline to submit a correct form to their state. In this situation, the IRS says affected taxpayers still need to request a new 1099-G from their state, but they shouldn’t wait for it to arrive before filing a tax return.
“Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received,” the IRS explains. “A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income.”
What can I do to protect myself from identity theft tax refund fraud?
The best way to protect yourself from identity theft tax refund fraud is a combination of good data security habits and adopting IRS-issued prevention tools.
Here are some commonly used data security tips:
- Install and activate security software
- Keep all installed software updated—even your operating system, word processor, and games
- Learn the common signs of phishing scams
- Don’t open emails from unknown senders
- Don’t click links and attachments in emails—even from someone you know
- Don’t scan QR codes in emails or web ads from unknown or unsolicited senders
- Never provide private information in emails, SMS, or the phone
The IRS has a specific tool for preventing identity theft tax refund fraud: an Identity Protection Personal Identification Number, or IP PIN.
“An Identity Protection PIN is a six-digit number that prevents someone else from filing a tax return using a taxpayer’s Social Security number,” the IRS writes. “The IP PIN is known only to the taxpayer and the IRS, and this step helps the IRS verify the taxpayer’s identity when they file their electronic or paper tax return.”
Check out the following resources to learn more about identity theft and claiming unemployment benefits:
Source: IR-2021-24
– Story provided by TaxingSubjects.com
by | Feb 3, 2021 | Tax Tips and News
The COVID-19 pandemic has caused significant financial strain for millions of taxpayers. From job losses and business closures to medical bills and lost revenue, unexpected costs and hardships have threatened to sink American families’ finances.
While unemployment benefits, paid sick leave, Payroll Protection Program loans, and stimulus money have helped some stay afloat, many have been forced to reach into savings and retirement plans to make ends meet. Fortunately, there is help for taxpayers who qualify for a provision of the CARES Act. It’s called a Coronavirus-Related Distribution, or CRD.
How does the Coronavirus-Related Distribution work?
The law allows qualified individuals—more on that in a minute—to withdraw up to $100,000 from their retirement accounts in 2020 without the 10% early distribution penalty for those under 59 1/2 years of age.
The income from the withdrawal should be reported on Form 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in three equal amounts over three years. The law gives taxpayers three years to spread the income out for tax purposes, but they’ll still be responsible for taxes on the withdrawal on a ratable three-year basis. So, if they don’t pay taxes on at least a third of the withdrawal in 2021, they’ll have to do it later—plus possible penalties.
Many taxpayers will take advantage of spreading the tax liability of their CRD distribution over three years, but others may prefer to pay tax owed in a single year. Those who choose to pay everything off in one year will still need to report the distribution on Form 1099-R.
Unfortunately, Congress has declined to extend the withdrawals past 2020.
Dec. 30, 2020, was the last day to take a CRD. However, if a taxpayer took a retirement distribution in 2020 and otherwise would qualify for a CRD but didn’t notify their plan provider at the time of the distribution that it would be a CRD, it is still possible to qualify. They just need to document and report the exception when they file Form 8915-E.
How do taxpayers pay back the Coronavirus-Related Distributions?
So, there are basically three payback options:
- Pay back the withdrawals within three years and escape any income tax on the total amount;
- Take longer than three years to pay back the withdrawal total and pay the income tax;
- Skip the payback altogether and pay the income tax (but pocket the withdrawal).
Remember that a plan has to allow such withdrawals to qualify for the tax break. Not all plans qualify, but most do.
Taxpayers qualify for a CRD if they, their spouse or dependents were diagnosed with the virus or if they had adverse financial consequences such as having a loss of income or being unable to work due to the pandemic.
For further reference, the IRS has a whole page of Coronavirus-related questions and answers for retirement plans.
What Coronavirus-Related Distributions payback plan should taxpayers take?
Like many tax-related issues, the best course depends on a taxpayer’s circumstances.
Generally, the consensus seems to be that the most efficient route is to pay back the withdrawal over the prescribed three years, and to file amended returns to recoup the tax already paid.
Ed Slott, writing for AARP, says the other two options share one flaw: If CRD withdrawals aren’t paid back, you don’t have those funds later for retirement.
Again, a major consideration will be the taxpayer’s own situation.
Slott also has some advice if a taxpayer’s retirement fund doesn’t allow CRDs.
“If yours does not, you can still withdraw the funds as a hardship 401(k) distribution and then treat them as a CRD on your personal tax return,” Slott writes.
For those taxpayers actively saving for retirement, Slott advises to first tap into other non-retirement assets if possible before decreasing your retirement funds.
He also strongly advises against using a Roth IRA for a CRD withdrawal. “It’s too valuable. It’s growing tax-free, and you don’t want to put a dent in that tax-free compounding. That’s your most tax-efficient and productive retirement account,” he stresses.
The key here, tax pros say, is to defer taxes. And in this case, the law allows the taxpayer to get those taxes back.
Some tax professionals also worry that many taxpayers just won’t be able to pay back the withdrawn retirement funds, possibly setting themselves up for a bigger tax bill later.
Getting a loan from one’s 401(k) isn’t necessarily the best option either. Ed Slott says while a loan from your 401(k) would be tax-free, it would have to be paid back within a strict timeframe or they would be taxable.
“You may be better off taking a CRD than getting involved with a 401(k) loan commitment and the resulting repayments and paperwork,” Slott writes. “With the CRDs, you can repay any amount you wish, on your own schedule, or not.”
Sources: “How to Take Money From Your Retirement Account Because of Covid-19“
– Story provided by TaxingSubjects.com
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