Filing Your Taxes in a Pandemic with Claudia Yi León of Taxes for Artists
We’re living in a brave new world in every respect, and our way of life BC (Before Coronavirus) was a vastly different universe from the one we’re operating in today. As 2021’s tax deadline approaches, things have gotten more complicated, and we’re so happy to have been able to sit with Claudia Yi León — who has led a superb workshop on taxes for our LA chapter — to get some tips as we navigate this tax season. Claudia has been a freelance Visual Effects Artist in the Los Angeles film and television industry for almost twenty years. She gives educational tax workshops for artists and creatives, runs a small tax practice, and is the brains behind the “Taxes for Artists” instagram account. She holds a M.S. in Taxation from CSUN. Previously, she earned B.A. degrees in Physics and Applied Math from UC Berkeley and a M.S. in Information Design and Technology from Georgia Tech. She was born in Lima, Peru, and raised in San Francisco.
Let’s get into it.
How did you go from VFX to Tax?
It was the 2007 financial crisis that piqued my interest in the nebulous category of “Money Stuff.” I took a bunch of part-time classes in Accounting, Economics, and Business Law at a community college. Taxation in particular stood out as incredibly important. The subject is often disparaged and little understood, yet the country grinds to a halt without it: wealth redistribution, infrastructure, energy policy, war, peace — none of it is possible without sound tax policy. Ten years later, I finished my MST. I still continue to work as an After Effects artist for half of the year.
How about a Coronavirus survival guide?
Three major COVID Stimulus packages have passed since the pandemic began, the last of which was signed on March 11, dead smack in the middle of tax season. Since a lot of economic aid is effected through the IRS and tax code, there are a number of issues to be aware of when filing taxes this year:
The IRS has extended the deadline to file and pay your 2020 taxes to May 17, 2021. That deadline also applies to your Roth IRA, Traditional IRA, ESA, HSA, and FSA, which may help lower your taxes. Note that you can still request an extension to October 15, however, that only extends your deadline to file, not to pay.
Check with your state to see if they’re conforming to this deadline. Not all are! A good place to check is the Turbotax Blog.
A Big Caveat: First Quarter 2021 estimated taxes were due April 15. If you did not hit this deadline, don’t worry, the underpayment penalty is less than 1% per quarter, so just make it up on the next quarter. And of course, check your state for their own estimated tax deadlines and penalty schedules.
There have been three rounds of stimulus checks so far. Most taxpayers making under $75K ($150K married) were entitled to receive $1200, $600, and $1400 per person, and additional checks for their dependents as well. Some important points to note:
Stimulus is not taxable! If you received a stimulus check last year but your income no longer qualifies you for one, you do not have to pay it back.
If your 2019 income disqualified you from receiving a stimulus check, but your 2020 income dropped and qualifies you for stimulus, you can reclaim the missing checks on your tax return as the Recovery Rebate Credit.
Remember that stimmy may come as direct deposit, a check, or as a debit card in an anonymous, spammy-looking envelope (yes, you can request another card if you threw it away).
The Federal Government has been providing Enhanced Unemployment to supplement your state’s payments, and PUA for independent contractors, who are traditionally locked out of the UI system. The additional payments were $450/week; now they’re $300/week until Labor Day in September.
On March 11, Congress allowed $10,200 per person of UI to be tax-free for income under $150K. So if you’ve already filed and paid tax on your UI, don’t worry; the IRS will recalculate your taxes and send you a refund. Do not amend your return; the IRS will begin these re-calculations in May.
As always, check with your state to see if they tax Unemployment Insurance! These are the states that do not tax UI: California, New Jersey, Oregon, Pennsylvania, Virginia, Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee.
Premium Tax Credit Repayment
If you receive too high an ACA health care subsidy because your actual income turns out to be higher than the income you estimated when signing up on the marketplace, in normal years, you are required to pay back the excess via your tax return. But not this year! For 2020, the PTC repayment is waived.
If you already filed your tax return before this law was enacted, again, the IRS implores you not to amend your tax return, but rather to wait for them to recalculate your return and send you back the difference.
Paycheck Protection Program:
By now you’ve surely heard about this aid program for small businesses that had one hell of a rocky start. The PPP program gave SBA-backed loans to small businesses, which can be forgiven if the loan is used correctly. That is, at least 60% of the loan must be used for wages, or if you’re a sole proprietor, single member LLC, or partnership, as self-employed income to the owners. The rest must be used for business rents, utilities, and other operating costs outlined on the SBA website. Once forgiven, the loan is not taxable, and the expenses paid with the loan are still deductible, on the federal tax return. Check with your individual state for their treatment of forgiven PPP loans. The Tax Foundation has a good infographic for that.
A lot of freelancers and small businesses were wary of this program, but the extensive rules for forgiveness have since been relaxed. If you get a PPP loan under $150K, the forgiveness application is literally a one-page document requiring nothing more than certifying that you used the loan correctly.
You must, of course, use the loan correctly and save the receipts for five years in case of SBA (not IRS) audit. The easiest way to use the loan correctly and minimize your paper trail is to use it 100% for wages or self-employment income, if that is an option for your business.
The loan is equal to 2.5 months of wages or self-employment income, with limits for high earners. You have 24 weeks from receipt to use the loan, and 24 weeks plus 10 months from receipt to apply for forgiveness. Additionally, sole proprietors grossing under $150,000 can use their Gross Income (before subtracting expenses) to calculate their loans, which is usually a bigger number than their Net Profit.
Lastly, if you’ve already received a PPP loan, you can apply for a second PPP loan if you have less than 300 employees, and can show that your revenue dropped 25% or more in any quarter of 2020 compared to the same quarter in 2019.
Other Relief Package Notes:
For 2020 and 2021, you’re allowed to deduct up to $300 of “above the line” cash donations made to 501(c)(3) charities. That means it’s easier to reduce your income by $300 and pay less taxes. Remember that political campaign donations are not tax deductible!
Business Meals are 100% deductible for tax years 2021 and 2022, so bring back that three-martini lunch. As always, you must document the business purpose of the lunch, who was there, what you talked about, and of course, keep the itemized receipts.
The Child Tax Credit for 2021 will be raised to $3,000 and $3,600 for kids under 6. The credit is an up-front monthly payment, with the first payments slated to begin July 1.
The Premium Tax Credit will now be extended to people on UI and the threshold for receiving a subsidy will be raised to 400% above the poverty line, allowing more people to receive healthcare assistance.
Because of tax laws too byzantine to explain, the extension of the April 15th filing deadline may result in the IRS paying you interest on your refund. Is the interest payment taxable? You better believe it. If you received one for 2019’s refund, don’t forget to include it in your income this year.
The latest American Rescue Plan aid package did make changes to the minimum threshold for receiving a 1099-K from Third Party Payment Networks, including such companies as Uber, Etsy, PayPal, etc. Beginning in 2022, if you receive more than $600 of income through a third party platform for selling goods or services, you will receive a 1099-K. Until 2022, you only received a 1099-K if you receive over $20,000 of sales and over 200 transactions.
Grants and Crowdfunding:
When receiving a grant of any kind, always ask if it’s taxable. Depending on its intended use, it may be considered income. In general, no-strings-attached gifts are not taxable to the recipient, although gifts over $15,000 are taxable to the giver.
Be careful when setting up GoFundMe sites, especially if they are for the benefit of another person. Crowdfunding sites are required to issue a 1099-K to the associated Tax ID number if certain thresholds are met. If you receive a 1099-K you must declare it on your return. Unfortunately there is no official IRS guidance on dealing with 1099-K gifts, but most tax preparers will declare the 1099-K income, then “back it out” (add a line subtracting the income), and attach a statement attesting to the gift nature of the monies. Save the receipts of the monies’ use, screen-capture the crowdfunding page details, and do not offer to exchange anything that could be construed as merchandise or services for the gift.
What are some fun facts in the tax code?
Rolling with the current zeitgeist, here are some surprisingly transformative miscellanea I’ve found in US Code Title 26:
Like the idea of a Universal Basic Income? Then fall in love with the Earned Income Tax Credit. A popular bipartisan program since the Nixon era, the EITC redirects up to $6,660 (for 2020) to working poor families through a refundable tax credit. No need for a Freedom Dividend, just write to Congress and tell them to raise the EITC cap.
What’s the deal with that Presidential Election Campaign checkbox on my return? In 1966, Congress attempted to get special interest money out of politics by providing public campaign funding. Candidates may choose to forgo private campaign funding and use the PEC fund instead. It’s not an additional tax; when you check the PEC box, you divert $3 of taxes you’re already paying towards the PECF instead of the General Treasury.
Yes, Menstrual Products: More recently, the CARES Act designated tampons and maxi pads as reimbursable Medical Expenses for HSA and FSA accounts. Period.
What are a few helpful resources for people to educate themselves?
The IRS website https://www.irs.gov/ will give you 95% of the information you need. Sign up for IRS Tax Tips emails or follow their twitter accounts @irsnews and @irssmallbiz for timely and useful information.
If you’re on Instagram, and you enjoy badly photoshopped stock photography, @irsnews https://www.instagram.com/irsnews/ is your jam. And of course follow @taxesforartists https://www.instagram.com/taxesforartists/ if you want some hot tax tips for aesthetes.
If you really want to go down the rabbit hole, the IRS Audit Technique Guide for the Entertainment Industry is full of all sorts of insights for our industry through the lens of an audit. You’ll find out what makes that toupée a business expense, and whether you can write off your psychic. https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs
Can I hire you?
I’m always down to put together fun and informative custom workshops for groups of any size, and I do one-on-one consultations as well. My tax practice is considering clients for tax year 2021 until September.
My general advice to artists overwhelmed at tax time: Don’t overthink it, and for this tax year in particular, make peace with uncertainty and patience, as this is a fast-moving and ever-changing story. For most well-meaning taxpayers, the consequences of not complying with IRS rules is usually an interest-based penalty, not jail, and many times you can request some penalty abatement. Just don’t lie, flake out completely on filing, and don’t avoid more than $5,000 of taxes with questionable expenses. And no, your gym membership is probably not deductible.