Tax woes, credit problems and bankruptcies could hit hard in 2021

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While 2020 was the year COVID-19 hit home, 2021 is expected to be the year the economy and daily life returns to normal, more or less.

This should bring more jobs, higher incomes and less financial stress in general.

But the new year will also mark a time when millions of Americans will continue to grapple with the financial fallout from the pandemic. Improvement will not come overnight, and some problems – tax payments, debt and savings deficits – could get worse before they get better.

Persistent tax problems

The COVID-19 pandemic has created widespread disruption for millions of taxpayers, professional tax preparers and even the Internal Revenue Service, which has had to close offices to slow the spread of the virus while overseeing new stimulus programs mandated by Congress. As of December, the IRS was still grappling with a backlog of 3 million paper returns, letters and other mail.

Many taxpayers have struggled to file their returns even after the deadlines were pushed back, and widespread job losses resulted in missed tax payments. Many people have accumulated tax obligations on unemployment benefits and retirement withdrawals, even though Congress has given some relief, such as allowing people to spread their obligations over three years.

Some 53% of Americans said they were worried about tax debt in 2021, including 76% who lost their jobs during the pandemic, according to a poll published in december by LendEDU. The main reasons for concern included taxable withdrawals from pension plans, taxes resulting from the sale of shares or other assets, and taxes on unemployment benefits.

About 10% of those polled said they were unable to declare and pay all of their 2019 tax obligations before the extended deadline of July 15, 2020.

In a december letter at the IRS and the Treasury Department, a bipartisan group of 14 senators urged the IRS not to punish people with penalties for filing tax returns late due to coronavirus concerns, especially since the pandemic has also closed the IRS offices.

In some cases, taxpayers who filed and submitted payments on time still received penalty notices and other IRS warnings, the letter said.

In addition to penalty relief, senators urged the IRS to set up a dedicated COVID-19 hotline and provide IRS officials with examples of cases where coronavirus relief might be warranted. They cited, as an example, low-income taxpayers who relied on the Volunteer Tax Assistance program but could not file a return after some stores closed.

Credit problems could get worse

Few people filed for bankruptcy in 2020, largely thanks to expanded unemployment benefits, stimulus payments, paycheck protection program business loans, foreclosure moratoria, forbearance of owners and other aids. In fact, consumer bankruptcy filings last year hit their lowest level since 1987, according to the American Bankruptcy Institute. Total deposits, including for businesses, fell 30% last year.

A stack of credit cards.

Personal credit scores also improved for many of the same reasons, rising seven points to an average of 710, the Experian credit bureau reported.

But credit problems could worsen in 2021, assuming federal and other aid is phased out.

Many consumers and businesses are “sitting on the edge,” waiting to see if conditions improve this year before filing for bankruptcy, said Amy Quackenboss, executive director of the American Bankruptcy Institute. “They’re waiting to see if things get back to normal.”

Some people might be digging their own holes, especially if jobs are coming back a lot in industries like accommodation and restaurants as the economy recovers and lockdowns loosen. But many companies, already in pain, may not come out of this, which could lead to permanent job losses, Quackenboss said.

Business bankruptcies are already on the rise. Quackenboss said she expects consumer deposits to also increase, at least to 2019 levels, in the coming year. However, she added that it is difficult to predict when as it all depends on efforts to remove the virus and how long federal and other assistance programs remain in place.

Save the challenges ahead

At first glance, many people are expected to save time more easily in 2021. The economic recovery is expected to continue as more people are vaccinated against COVID-19. And that should lead to an increase in air travel, hotel stays, restaurant dinners, concerts, sporting events, etc., along with the jobs they support. For those at the bottom of the ladder, minimum wages have risen or will rise this year in nearly half of the states, including Arizona.

410k savings

But Americans have struggled to save money even when the economy is booming, and now there is a lot of damage to contend with, including higher credit card balances and rent arrears and mortgage payment for many.

With Democrats now in control of the White House and both houses of Congress, we might see more attention given to progressive savings proposals such as New Jersey Democratic Senator Cory Booker’s plan for federal baby bond payments to all children’s savings accounts at birth.

The Biden campaign has also expressed support for down payment assistance programs to broaden the homeowner base and for replacing the current system of contributions to tax-deductible pension plans, which tend to favor high-income taxpayers. , by a tax credit that would essentially give everyone the same dollar tax break (for contributions of equal size).

But some of these ideas and other tax incentives could prove too conflicting and costly.

“While Republicans may have lost leadership in both houses, they still have dominant minorities who can block everything out of the mainstream,” wrote Brad McMillan, chief investment officer at Commonwealth Financial Network. “In that sense, nothing has really changed in terms of policies that can be adopted.”

The country’s personal savings rate actually improved last year, despite many job losses. The rate in November, the most recent month tracked by the Bureau of Economic Analysis, was 12.9%, down from 7.6% at the end of 2019. However, much of the improvement was related to stimulus payments and other temporary aids.

Meanwhile, banks and other entities are rolling out programs that could help.

For example, BMO Harris Bank said it will now deposit a bonus of $ 5 each month into the personal account Premium Savings Accounts customers who increase their balances by $ 200 or more, for up to 12 months. Small businesses can earn a $ 10 bonus in the months they increase their balances by at least $ 500. Participating customers also receive monthly email reminders to save and congratulatory messages when they do.

There is a good chance that other types of programs will debut this year to encourage people, in various ways, to save.

Reach Wiles at [email protected].

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