In contrast to all of the great things the CARES Act has done to help American workers and taxpayers, this Tax Holiday can actually be dangerous to the individuals it is designed to help. The Presidental memorandum – entitled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” – which defers tax obligations is likely going to mess up many people’s budgets come January 2021. As a business that serves the public through personal financial help and tax filing, the tax professionals at NTRC recommend you do not participate in the Tax Holiday.
What is the 2020 Tax Holiday?
As part of an ongoing effort to get money into the pockets of American workers, taxpayers, and those who have lost their jobs due to COVID-19, President Donald J. Trump signed a memorandum into effect on August 8th, 2020. This Budget and Spending memorandum allows the deferment of income taxes for anyone who falls under $104,000 of pre-tax income yearly. According to Trump, “amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.”
For example, let’s say your yearly gross income is $44,000 and you usually pay $300 bi-weekly in taxes. If your employer opted into the Tax Holiday for 2020, you would be receiving an extra $600 per month in your paychecks. For some families, this could mean the difference between making rent payments on time or staying behind. While the incentive is massive for taking the Tax Holiday, we ask all of our clients to keep in mind that this is a deferment, not a stimulus.
The Difference Between Deferment and a Stimulus
Much like the checks we saw in the second quarter, stimulus packages are a gift from the government not intended to be paid back. Unlike the stimulus checks, this Tax Holiday is a deferment; this means that the memorandum expects you to pay back every extra dollar you use when the “holiday” ends. There is a section in the letter that implies that there may be some tax forgiveness in the future, but we shouldn’t base our financial decisions on this probability.
According to the memorandum, “the Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” With eyes focused on the presidential election, we’re unsure how much attention the elimination of deferred tax obligation is going to get. For those who are budgeting and trying to make the numbers work now, don’t take the short holiday only to be stuck deeper in the hole come the end of the holiday (January 1st, 2021).
If you’re absolutely set on accepting the Tax Holiday for your paychecks through the end of 2020, be smart and prepare for repayments. If deferred tax obligations do get eliminated, you’ll be ahead of the game! Reach out to the tax team at NTRC Tax for more information or to get recommendations for your personal finance situation. We would be more than happy to help you navigate this difficult time and avoid getting into financial trouble.