Because the Covid-19 pandemic has wreaked havoc on the economy, there have been several programs designed to lessen the impact on individuals. Many people have received funds from sources that they’ve never dealt with before. It’s important to understand the tax implications of these coronavirus-related payments, so let’s look at some of the more common ones.
Many taxpayers received an Economic Impact Payment (EIP), better known as a stimulus check, earlier this year. A quick summary of who qualified for the payments and how they were calculated can be found here. The EIP will be reported on your 2020 tax return because it was an advance payment on a tax credit for 2020. Taxpayers who met the EIP criteria but did not receive the full amount for which they qualified will get the unpaid amount as a refund on their 2020 return. Taxpayers who received a larger payment than they qualified for will not have to return the excess, with one exception: the IRS has stated that anyone receiving an EIP for a deceased taxpayer should return the payment.
Bottom Line: Stimulus checks will be reported on your 2020 return but will not be taxed
With so many business closings, many workers found themselves without an income. Several programs were implemented to expand upon the usual unemployment insurance payments (UI), including Pandemic Unemployment Assistance (PUA) for people who would not normally qualify for UI, and the Federal Unemployment Pandemic Compensation program which added an additional $600 (later changed to $300) payment to UI benefits. Regardless of which program administers the benefits, all unemployment payments are taxable. Unemployment benefits recipients should have been given the opportunity to have taxes withheld from their checks; if this option was not chosen, they should set aside sufficient funds to pay the taxes that will be due when they file their 2020 return.
Bottom line: Unemployment is taxable. Check your withholding now and set aside funds to cover any shortfall.
While the EIP and UI were widely discussed in the media, one benefit that slipped by many was the Pandemic Electronic Benefits Transfer. The P-EBT was an additional payment of approximately $379 per child made to families who receive free or reduced-price lunch in public schools. However, because many schools in low-income areas participate in a federal program that makes lunch free to all students regardless of family income, some families found themselves getting unexpected P-EBT cards in May. These payments are not taxable and will not be reported on your 2020 return. Some recipients reported using the funds to purchase food to donate to local food banks; these donations can be deducted by those who itemize if they kept proper receipts.
Bottom line: The P-EBT payments are not reported or taxed.
Finally, quite a few “Go Fund Me” type appeals have been set up to assist people who have been affected by Covid-19. If you were on the receiving end of others’ generosity, you will not have to report the funds on your tax return. Monies received from these types of appeals are considered to be a gift from the donor to the recipient, so no taxable income is involved. However, the opposite is also true … because these funds are a gift to an individual, donations cannot be deducted as a charitable contribution. Next week we’ll look closer at Covid-19 related deductions.
Bottom line: Funds received from Go Fund Me and similar programs are not reported or taxed.
If you have questions about any new income, be sure to give us a call. There’s still time to adjust withholding or to make estimated payments to avoid a nasty surprise when you file your 2020 return.
