Written on behalf of Feigenbaum Consulting
The turn of a new year means that tax season is not far away. In the United States, the tax filing deadline is not until April 15, 2021. But with COVID-19 having been a part of our lives through much of 2020, there have been significant considerations introduced to taxes this year. In this week’s blog, we want to share some of these new developments in US tax well ahead of when taxes are actually due.
Stimulus checks are not taxable
Many Canadians who received money through the Canada Emergency Response Benefit may find themselves with an unexpected tax bill if they didn’t put some of that money away for taxes. That’s because CERB payments count as taxable income in Canada. However, the same is not true for those who received stimulus cheques in the United States. Taxpayers in the United States received $1,200 for each adult in their home as well as $500 for each minor. That means a family of three would have received $3,900, none of which is taxable.
Borrowing from retirement savings
Another point of distinction between Canada and the United States is that the US CARES Act allowed people to “borrow” up to $100,000 from a retirement count through 2020. Normally this money would be taxable and subject to a 10% early withdrawal penalty. Obviously, under normal circumstances, it would be incredibly unwise to take money out of a 401(k) or IRA before retirement. However, the CARES Act states that money taken out in 2020 (again, up to $100,000) will be able to receive a refund on taxes paid as a result of the withdrawal if the money is paid back within three years.
Canadians have no such luck in this regard. Anyone who took money out of an RRSP in 2020 will have to pay income tax on that money reflective of their highest tax bracket when it comes time to pay tax in the Spring.
Unemployment benefits during COVID-19
With COVID-19 having a disastrous impact on the global economy, many Americans found themselves out of work throughout the pandemic, particularly in its earliest days when many cities were completely shut down. It’s important to note that anyone who received unemployment benefits whether related to COVID-19 or not will have to pay income tax for that money. Of course, those who elected to have taxes withheld at the time of payment will avoid taxes, those who did not will have to pay.
In related news, some businesses may have applied for Paycheck Protection Program Loans, also known as PPP loans. These loans, if used on eligible expenses such as rent, mortgages, or payroll, will be forgiven. But that doesn’t happen automatically. Instead, recipients need to apply to have the Small Business Administration put that forgiveness in place. Additionally, any expenses paid using PPP loan money can be deducted from taxable income.
We will be sure to cover this topic for Canadians as well as their tax season approaches. At Feigenbaum Law we offer tax planning solutions to Canadians, Americans, and those who have interests on both sides of the border.
Contact our tax planning and tax law team for a custom solution to your personal tax planning needs. Our unparalleled knowledge of US and Canadian tax makes us leaders in this field. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.