There was a lot of money handed out by the government in 2020. Last year’s chaos brought the need for unemployment and stimulus checks to help many people get through financial challenges.
First we had the $1200 stimulus checks. The $600 per week of unemployment started about the same time. The Small Business Administration began giving forgivable PPP loans shortly after so small business could retain their employees. Then the second stimulus checks of $600 were sent out at the beginning of this year.
How does all this “free money” affect your taxes come April 15th?
The short answer is, it depends on how you get it. So let’s get into stimulus checks, unemployment, and the PPP loan and how you may be affected tax-wise.
1. Stimulus Checks
First, the stimulus checks are not taxable. So you can breath one sigh of relief.
Or two sighs if you’ve gotten your second check!
2. Unemployment
The unemployment checks are taxable, not only by the federal government but also the state depending on the state in which you reside. If you live in California, New Jersey, Oregon, Pennsylvania, or Virginia, you’re in luck because you’ll get to keep your unemployment benefits free of state income tax. Same with those who live in income tax free states like Texas or Tennessee.
Being an Ohio resident, I’m super jealous.
In the remaining states, taxes will need to be paid for these unemployment benefits when filing state and federal tax returns. One thing to note, when you signed up for unemployment, you should have had the opportunity to opt into tax withholdings for your checks throughout the time you would receive them.
If you did, you have nothing to worry about! If not, you may have some preparation to do. But with it being February, you still have a little bit of time to save up before your tax bill comes due on April 15th.
The wife of a friend of mine was laid off last year and got unemployment until she was called back into work. Unfortunately, he just found out that taxes weren’t being withheld. He just told me today that after having filed their taxes, they’ve got a good size bill they have to take care of now.
If you normally get a large tax refund, you might not owe anything. It just depends on how long you’ve been on unemployment.
What I would recommend is going to a service like TurboTax, fill out your income and unemployment information for taxes, then use that to figure out if you will still receive a tax refund or if you will owe the IRS when you file. Or, better yet, a CPA can look at your taxes and help you understand whether you’ll owe or not.
3. PPP Loan
Now for you Small business owners who got the PPP loan from the small business administration, how does this apply to you? The short answer is that business expenses that the PPP loan is used for are tax deductible.
But keep this in mind, the SBA has VERY SPECIFIC guidelines for how the PPP funds can be used. You can’t just use the money for any “business expense” and write it off. For one, 60% of the funds must be used to maintain employee salaries based on historic salaries paid. The other 40% must be used on utilities, mortgage interest, rent, etc.
If any of those funds are not used for those categories within the time period the SBA specifies, those funds cannot be forgiven and will require repayment to the SBA and will qualify as taxable income.
Get ready for tax day!
With all that money given out last year, we want to be well prepared for tax day! I hope this helped provide you with a bit of understanding how you might be affected. If you’re on the wrong side of the tax bill, take it on yourself right now to start saving as much as possible to make your taxes right!
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Disclaimer: Do your own research. My content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. Though I teach financial principals, I am not an investment advisor and none of my advice constitutes legal, tax, or investment as a professional. Everything I share is based on my own research and is intended for your benefit.
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