2021 may see pandemic’s fallout

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

That should bring more jobs, higher incomes and less financial stress generally.

But the new year also will mark a time when millions of Americans continue to grapple with the financial fallout from the pandemic. Improvement won’t come overnight, and some problems — tax payments, debts and saving deficits — could get worse before they get better.

Lingering tax problems

The COVID-19 pandemic created widespread disruptions for millions of taxpayers, professional return preparers and even the Internal Revenue Service, which had to close offices to slow 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 correspondence.

Many taxpayers had trouble filing returns, even after deadlines were pushed back, and widespread job losses led to missed tax payments. Many people wracked up tax obligations on unemployment benefits and retirement withdrawals, even though Congress provided 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 work during the pandemic, according to a survey released in December by LendEDU. Top reasons for concern included taxable withdrawals from retirement plans, taxes that resulted from selling stocks or other assets, and taxes on jobless benefits.

About 10% of respondents said they weren’t able to file and pay all of their 2019 tax obligations by the extended July 15, 2020, deadline.

In a December letter to the IRS and Treasury Department, a bipartisan group of 14 senators urged the IRS not to punish people with penalties for filing tax returns late owing to coronavirus problems, especially as the pandemic also shut down IRS offices.

In some cases, taxpayers who did file returns and submitted payments on time still received penalty notices and other IRS warnings, the letter asserted.

In addition to penalty relief, the senators urged the IRS to set up a dedicated COVID-19 hotline and provide IRS representatives with examples of when coronavirus relief might be warranted. They cited, as an example, lower-income taxpayers who relied on the Volunteer Income Tax Assistance program but couldn’t file after locations shut down.

Credit issues could worsen

Not all that many people filed for bankruptcy in 2020, thanks largely to expanded jobless benefits, stimulus payments, Paycheck Protection Program business loans, foreclosure moratoriums, landlord forbearance and other help. In fact, consumer bankruptcy filings last year ebbed to their lowest level since 1987, according to the American Bankruptcy Institute. Total filings, including for businesses, fell 30% last year.

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

But credit issues could worsen in 2021, assuming federal and other assistance is gradually withdrawn.

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

Some individuals might dig out of their holes, especially if jobs return big time to industries such as lodging and restaurants as the economy recovers and lockdowns ease. But many businesses, already suffering, might not make it, which could lead to permanent job losses, Quackenboss said.

Business bankruptcies already are rising. Quackenboss said she expects consumer filings also will increase, at least back to 2019 levels, in the coming year. However, she added that it’s difficult to predict the timing as so much depends on efforts to suppress the virus and the length that federal and other assistance programs stay in place.

Saving challenges ahead

At first glance, a lot of individuals should have an easier time-saving money in 2021. The economic recovery should continue as more people get inoculated against COVID-19. And that should make for increased airline travel, hotel stays, restaurant dinners, concerts, sporting events and so on — plus the jobs they support. For people at the low end, minimum wages have risen or will increase this year in nearly half the states, including Arizona.

But Americans have had trouble saving money even when the economy is booming, and now there’s a lot of damage to contend with, including higher credit card balances and back rent and mortgage payments for many.

With Democrats now in control of the White House and both chambers of Congress, we could see more attention paid to progressive saving proposals such as New Jersey Democratic Sen. Cory Booker’s plan for “baby bond” federal payments into the savings accounts of all children at birth.

The Biden campaign also has voiced support for down payment assistance programs to broaden the homeowner base and for replacing the current system of tax-deductible retirement-plan contributions, which tend to favor upper-income taxpayers, with a tax credit that would essentially give everyone the same dollar tax break (for equal-sized contributions).

But some of these ideas and other tax incentives could prove too divisive and expensive.

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

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

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

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

There’s a good chance other types of programs will debut this year to incentivize people, in various ways, to save.