Tax Tips — August 14, 2020

What Trump’s 4 Executive Orders Mean for Your Taxes

by Susannah McQuitty

Four executive orders for COVID-19 relief may affect your personal tax return.

Updated September 3, 2020

President Trump signed four executive orders on Saturday, August 8 in response to the stalemate in Congress over COVID-19 relief. Let’s take a look at each executive order and examine how it may affect your taxes in some way or another.

What are the four executive orders for Trump’s COVID-19 relief?

The executive orders that President Trump signed reinstated federal unemployment insurance up to $400, extended a form of eviction protection, continued student debt relief through the end of the year, and deferred payroll taxes through December 31.

Now let’s look at the tax implications of each and how you may be affected.

How will taxes work for the executive order on unemployment insurance?

The new order concerning unemployment insurance payments won’t change the way your income taxes are handled, but it’s good to remember that all unemployment insurance payments are considered income and taxed accordingly.

Unemployment payments will continue at $400 (instead of the $600 provided by the CARES Act) if individual states pay $100 of that amount. If that $100 cannot be provided by the state, the federal government will still provide $300.

Income taxes aren’t automatically withheld from unemployment insurance payments the way they are from your paychecks. The IRS will withhold a flat rate of 10% upon request (by using Form W-4V), but that may be more or less than you owe based on factors like number of dependents. If you are likely to owe more than $1,000 in total income taxes, you should make quarterly estimated tax payments to avoid penalties for underpayment.

Either way, whether you have taxes withheld or make quarterly payments (or both), you are responsible for tracking and paying any taxes owed from unemployment payments.

It’s worth noting that the federal unemployment insurance may take a little while to be distributed—there’s always some red tape, right? This has to do with the fact that benefits are originating from an executive order instead of legislation, and that new territory comes with new challenges.

The bottom line: Check the withholding on your unemployment income. If necessary, set aside money to be able to pay the taxes on that income or make quarterly payments, regardless of whether the funds come from the state or federal government.

How do taxes work for eviction protection?

The relation between taxes and eviction protection is a bit less clear. In the executive order, numerous federal agencies have been tasked with identifying solutions to continue to protect those at risk of eviction or foreclosure due to Covid-19. New financial assistance options could become available and the tax treatment of that aid would need to be determined.

We’ll keep you updated on those changes as they unfold.

Will student loan debt relief during Coronavirus affect my taxes?

Yes: Student loan interest deductions will be lower next year, since you won’t be paying as much interest during 2020. That means your student loan interest deduction loses value, but if you look at what you’re saving in the long run by not having to pay the interest in the first place, that’s a swap worth taking.

Student loan debt relief in the form of a suspension of payment and setting interest rates to 0% will continue through the end of the year. It’s important to note that this doesn’t prevent you from making payments; if you wish to continue making student loan payments, you are allowed to do so.

How will the payroll tax deferral affect my personal taxes?

Payroll tax covers Social Security and Medicaid, and is usually withheld from taxpayers’ paychecks by their employer. A “deferral” simply means you have more time to pay taxes, not that the taxes are removed completely. When your employer is instructed not to withhold payroll taxes, those tax payments are simply being put off until later.

Any payroll taxes that accrue between August 8 and December 31 will be put off until the period between January 1, 2021, and April 30, 2021. Penalties and interest for unpaid taxes begin on May 1, 2021, so it’s a good idea to calculate your taxes owed and have a plan to pay that amount back between January 1 and April 30 next year.

Each bi-weekly pay period is considered individually for the deferral: As long as you make less than $4,000 in a bi-weekly pay period, you’ll qualify. If there is an odd two weeks where you make more than $4,000, the payroll taxes on that pay period won’t be deferred. Likewise, if you have an odd couple of weeks where your typical pay dips below $4,000, your payroll taxes for that check will qualify for the deferral.

Note that the payroll tax deferral does not apply to self-employed taxpayers: self-employed persons will continue to pay taxes once every quarter.

In addition to the deferral, President Trump has directed the Secretary of the Treasury to explore options for forgiving the amount deferred. So there’s a chance you may not have to settle your payroll tax tab in 2021. Time will tell if Secretary Mnuchin can make this happen.

Keep an eye on the blog for more info as it unfolds!

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