Debt Crisis

Consumers Are Facing New Tax Problems That Could Get Much Worse in 2021

In pandemic-mode, many are relying on unemployment benefits, retirement funds, and stock sales to make ends meet

by Mike Brown

Mr. Brown is Director of Communications with LendEDU, a consumer lending company. Visit here to read his taxpayer debt survey.

Americans struggling to repay their 2019 taxes in the midst of a recession has been just another issue to deal with during the coronavirus pandemic. Recognizing this, the Internal Revenue Service (IRS) actually extended the filing and payment deadline for 2019 tax obligations from April 15, 2020, to July 15, 2020. The extension may have temporarily stopped the bleeding, yet there’s a looming tax debt crisis that has the potential to boil over in 2021 when 2020 taxes are due. That’s because millions of Americans took to relying on unemployment benefits, retirement funds, or stock sales to stay afloat amidst the pandemic recession.

All of those things could lead to a heavier tax obligation in 2021, and with many people still out of work and struggling to get by, the country could be looking at staggering tax debt numbers next year. The U.S. tax gap (total outstanding tax debt) currently hovers around $400 billion, but that figure could approach crisis levels after next year’s tax season. To capture the struggles from the 2020 tax season and also the fears regarding the 2021 tax season, LendEDU surveyed 1,000 adult Americans to better understand what the average taxpayer has been dealing with during these unprecedented times.

Laid Off & Left Behind

As mentioned above, the IRS extended the deadline to pay 2019 taxes by three months given the financial hardships experienced by many as a result of the coronavirus pandemic and recession. However, paying all taxes owed by the July 15th deadline was still impossible for many Americans, especially those who have lost jobs due to the pandemic. Amongst respondents who have lost their jobs during the coronavirus pandemic, 17% were not able to pay their 2019 taxes on time and in full.

Even if you are unable to fully pay all tax obligations by the filing deadline during any given year, you should always file your tax returns on time. When dealing with the IRS, a failure-to-file penalty is much worse (5% of unpaid taxes for each month your tax return is late, up to 25%) then a failure-to-pay penalty (.5% of unpaid taxes for each month you don’t pay, up to 25%). Yet still, data from our survey found many Americans that couldn’t pay all their taxes on time also didn’t file on time.

32% of taxpayers who couldn’t pay all 2019 taxes on time didn’t file their taxes by July 15th either. Even worse, 72% of these taxpayers who missed the July 15th filing deadline still have yet to file their tax returns for 2019, which could lead to serious financial and legal troubles. For American taxpayers that still have some amount of tax debt from the 2019 tax year, the average amount remaining is $3,662.

Taxpayers Left To Worry About Debt

The 2021 tax season is shaping up to be a brutal one as the full financial ramifications of the coronavirus pandemic and recession develop. The majority of adult Americans, especially those who have lost their jobs at some point during the pandemic, are fearful about tax debt next year.

Amongst all taxpaying respondents, a combined 53% are worried about owing tax debt next year as a result of the coronavirus pandemic and its economic impacts. However, the real story within the data to this particular question is what happens when the results are segmented to only include respondents that have been laid off at some point during the pandemic.

The 2021 tax season is shaping up to be a brutal one as the full financial ramifications of the coronavirus pandemic and recession develop. The majority of adult Americans, especially those who have lost their jobs at some point during the pandemic, are fearful about tax debt next year...

Within that cohort, a combined 76% are worried about having tax debt next year. This could be due to unemployed respondents not having the confidence in their savings or general financial situations to cover tax obligations next year. It could also pertain to the taxable unemployment benefits they have likely been collecting throughout the pandemic.

Americans Worried That Financial Maneuvers They Made to Stay Afloat May Lead to Larger Tax Bill in 2021

The coronavirus pandemic and recession put many Americans in dire financial straits. Because of this, many people not only relied on unemployment benefits but also turned to more drastic measures like dipping into a retirement account or liquidating investments. And according to our data, such maneuvers have applicable taxpayers concerned about their tax bill in 2021. For reference, 19% of respondents borrowed money from a retirement account due to the pandemic recession, including 34% who were laid off. Additionally, 18% of respondents sold stocks or liquidated other investments due to the pandemic recession, including 30% who had lost their jobs.

Would any of these actions actually lead to a larger tax obligation when tax season rolls around next year? While things are constantly changing due to the global pandemic, unemployment benefits are taxable on a federal level and in most states. So, unemployment benefits will likely lead to a larger tax bill in 2021 for those who received them. The stimulus checks that came as part of the CARES Act aren’t subject to taxes, but since they are an advance on a person’s 2020 tax credit, they need to be reported when filing 2020 taxes. Still, tax debt stemming from stimulus checks shouldn’t be a concern.

Normally, any type of early withdrawal from a retirement account will get added to your income and thus subject to income tax, while also being subject to a penalty tax from the IRS. However, as a result of the pandemic, the IRS is waiving the penalty tax for early withdrawals up to $100,000 and is also expanding the window for paying the additional income tax. On this one, taxpayers will likely get a larger bill from Uncle Sam in 2021.

Finally, any stock that is sold for more than the investor paid for it is subject to a capital gains tax if the stock was held for at least one year. The capital gains tax rate is lower than the rate applied to other taxable income. But, any profits from stock sales when the stock was held for less than one year will be taxed at the ordinary income tax rate. With many folks making impulsive market moves in the early months of the pandemic, stock sales could definitely become a big driver of tax debt in 2021.

Regardless of specific actions, it’s clear that paying 2020 taxes next year is going to be a mess for most and a struggle for those who had to resort to consequential financial decisions to survive the pandemic recession.

 

 

 

Methodology
All data found within this report is based on a survey commissioned by LendEDU and conducted online by survey platform Pollfish. In total, 1,000 adult Americans were surveyed. The appropriate respondents were found via Pollfish’s age filtering feature. This survey was conducted on December 1, 2020. All respondents were asked to answer all questions truthfully and to the best of their abilities.