CLEVELAND — The IRS will not start accepting tax returns until Feb. 12 but when you do get ready to file, there are a litany of changes this tax season that could increase your refund. Those changes include possible deductions and important rebate credits for those that missed out on part or both rounds of stimulus money.
At the onset of the pandemic and after the passage of the CARES Act, the federal government wanted to start sending out stimulus checks as quickly as possible. Instead of waiting for people to finish filing their returns, the IRS used 2018 tax returns to determine whether people were eligible for the stimulus checks and to what degree. When the stimulus checks started arriving in people’s mailboxes and bank accounts, many realized that they did not receive the full amount, which was $1,200 for individuals and $500 for qualifying dependents.
For example, the Jones Family, which has one child, jointly files each year. In total, the family received $2,900 in stimulus payments, assuming the family’s income did not exceed a threshold set by the IRS. Then, as part of another COVID-19 relief package passed by Congress in December, the Jones Family received a second round of stimulus payments, which amounted to $1,800. The second round of payments, which was based off of the family’s 2019 tax returns, amounted to $600 individuals and $600 for their dependents.
All told, the Jones Family received $4,700 in stimulus payments.
“This became the baseline of the recovery rebate credit,” said Michael Issa, an accountant and owner of ITS Tax Pro. “Stimulus payment is actually an advance payment on the recovery rebate credit. That means if you did not receive your full amount the first time around or the second time around, you get a third shot at it on your 2020 tax return.”
Because both the first and second round of stimulus payments were based off your 2018 and 2019 tax returns respectively, the stimulus payments were, essentially, based off of outdated tax-related information. For those that had changes in their filing status or have had more children since 2018 or 2019, their stimulus payments did not reflect those changes. Additionally, the stimulus payments did not reflect changes in income between 2019, 2019 and 2020.
For example, if the Jones Family had a drop in income in 2020 and it fell under the IRS’ threshold — also called the gross adjusted income — the Jones Family would have qualified for the stimulus payments. However, because those payments were based off of prior tax years, the family only qualified for partial payments or possibly none at all. That’s where the recovery rebate credit comes in.
“I know a lot of people out there are still going, 'I didn't get my stimulus, what do I do?' Where do I go? How do I approach this?’” Issa said. “That's exactly how you approach it: put it on your 2020 tax return.”
If the Jones Family only received $2,700 in stimulus payments but their 2020 tax returns show they qualified for the full amount of $4,700, the difference ($2,000) would either result in a larger refund check or a smaller amount the family owes. This scenario also applies to those who have had changes in their filing status; those who now have additional dependents; those that changed banks or have different direct deposit information since they last filed their taxes.
“It'd be hugely beneficial going into the 2020 tax season. I think a lot of people need to know that,” Issa said.
Issa said people need to keep an eye out for a letter from the IRS which will contain Notice 1444. The document will specify and verify how much money the tax filer received from the stimulus payments. That information will allow people or their tax professionals to determine if they qualify for the recovery rebate credit. In addition to the credit, the limitations of charitable contributions have also been temporarily lifted. When Congress passed a series of tax cuts in 2017, it placed limits on charitable contributions, which led to more people opting for the standard deduction instead of an itemized deduction. Issa said for taxpayers that don't take the itemized deductions, they may take a charitable deduction of up to $300 for cash contributions in 2020 and 2021 to qualifying organizations. You can take the standardized deduction and still make a $300 charitable deduction in 2020, Issa said.
“The government is encouraging people to go out there to donate so they can give you that deduction,” Issa said.
The deductions aren’t just limited to charitable contributions. For some business owners, there may be ways to deduct meal and entertainment expenses under certain parameters. For example, under new guidance released by the IRS last fall, restaurants may deduct 100% of the food and beverage costs associated with employee shift meals, assuming the meals provided to the employees are purchased for the purpose of providing meals to paying customers.
Simply put, if the restaurant feeds its employees with food that the average customer can order off the menu, the expense is deductible.
Additionally, 50% of business meals are now deductible under certain circumstances. Also, if a business owner takes two clients to a sporting event and buys them hot dogs and a soda, the cost of the food will be deductible. However, the cost of the tickets will not be deductible. Food and beverage costs that were incurred to the benefit of a company’s employees are also 100% deductible, including holiday parties and other events, so long as the events aren’t solely to benefit highly compensated employees.
“That's to encourage people to go out and get dinner, bring in lunch for their workers. That has helped boost the restaurant industry because they have taken a huge hit in this pandemic,” Issa said. “It’s unique in nature because the IRS is not huge on meals and entertainment because a lot of people take advantage of it. For them to go to 100 percent, that's huge. For them to put that charitable deduction on page 1 is quite significant as well.”
For more information on the recovery rebate credit, click here.