Preparing for Tax Season in 2021

With tax deadlines right around the corner, check out these tips to make filing 2020 taxes a breeze. Also, feel free to check out our Free Tax Preparation Checklist.

Filing Date Deadlines

• Tax Day is Thursday, April 15, 2021.

  You have to file your 2020 tax returns by this date!
• The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly.

Income tax brackets increased in 2020 to account for inflation. The tax rates are the same, however there are some slight changes to the brackets. Check out the chart below for specific marginal income tax rates and brackets.

2020 Marginal Income Tax Rates and Brackets

When paying taxes, you have the option of taking the standard deduction, or itemizing your deductions. By itemizing, you calculate your deductions individually. This can be more of a hassle, but could be worth it if your itemized deductions exceed the amount of the standard deduction.[1]

Every situation is different when it comes to itemizing or doing a standard deduction, so be sure to talk to a tax consultant or evaluate your specific situation to decide what’s right for you.

Steps to Make Filing Easier [2]:

1. View your account information online

   - access the latest information available about your federal tax account through the IRS’s secure and convenient online access. By viewing your account online, you can view the amounts of Economic Impact Payments (EIP), and the amount of your adjusted gross income (AGI) from 2019.

2. Gather your tax records

   - Having your records organized makes preparing to file your tax return easy. Here’s what to include in your tax records:
   1. W-2 Forms from employers
   2. 1099 from banks and other payers
   3. Other income documents and records of virtual currency transactions
   4. 1095-A, Health Insurance Marketplace Statement, if you purchased Marketplace coverage
   5. Notice 1444, Your Economic Tax Payment, if you received an Economic Impact Payment and think you qualify for the Recovery Rebate Credit

3. Check your individual Tax Identification Number (ITIN)

   - Be sure your Individual Tax Identification Number (ITIN) hasn’t expired before you file a tax return in 2021. If you need to file a tax return in 2020, the IRS recommends you submit a Form W-7, Application for IRS Individual Taxpayer Identification Number.

4. Make sure you withheld enough

   - The IRS has a tax withholding tool to help you determine the right amount of tax to withhold from your paycheck, and if you need to make any adjustments and submit a new Form W-4 to your employer.

For further information about tax filing, please consult the IRS website at irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes

Deductions and Credits to Consider

Tax deductions

lower your taxable income, and reduces your tax liability.[3] You can subtract the amount of the tax deduction from your income, making your taxable income lower. Tax credits are not refundable. The lower your taxable income = the lower your tax bill.

Tax credits

are a dollar-for-dollar reduction in your actual tax bill.[3] A few credits are refundable, meaning if a credit is greater than the amount you owe, you will be paid the difference as a refund. For example, if you owe $250 in taxes but qualify for a $1,000 credit, you’ll receive a check for the difference of $750. If the credit is nonrefundable, your tax bill will be reduced to zero, therefore you won’t receive a refund.

Here are a few tax deductions and credits you may be able to claim on your 2020 tax return:

• Charitable Deductions

  - If you choose to itemize, you may be able to subtract the value of charitable gifts from your taxable income.[3] Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year.[4] To qualify, the contribution must be:
  • A cash contribution;
  • made to a qualifying organization;
  • made during the calendar year 2020
  Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.[4] If you’re taking the standard deduction, the CARES Act added a new “above-the-line” deduction to help you write off up to $300 of charitable contributions you made in cash.[1]

• Medical Deductions

  - You might be able to find some tax relief if you have hefty medical bills, or spent time in the hospital. You can deduct medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you take.[1]

• Business Deductions

  - If you’re self-employed, you can claim certain deductions on your tax return for travel expenses, or if you use part of your home to conduct business. However, the home office deduction only applies to those who are self-employed.[1]

• Earned Income Tax Credit (EITC)

  - The EITC is a refundable credit to help low and middle-class income workers, earning up to $56,844. Depending on your income, filing status, and how many dependents you have, this credit could save between a few hundred dollars, to a few thousand dollars.[1]

• Child Tax Credit

  - Families can claim up to $2,000 per qualified child, subject to income limits. This is a refundable credit, and a family could potentially receive up to $1,400 per child.[1]

Also, there are other deductions and credits that might be beneficial to your situation. Consult with your tax advisor to make sure you’re getting the most of any potential deductions or credits.

COVID and Your Taxes

The pandemic and subsequent government response created a ripple effect for filing taxes. Here are a few things to remember:

• Stimulus Checks

  - Lawmakers passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to distribute stimulus payments in the amount of (up to) $1,200 to eligible taxpayers. This income will not count as taxable income.[1] Instead, it’s being treated as a refundable tax credit for 2020.

• Paycheck Protection Program (PPP) Loans

  - As part of the CARES Act, relief was offered to struggling small business owners to assist with certain business expenses – payroll, rent or interest on mortgage payments, and utilities. These loans are designed to be forgivable.[1] Any eligible expenses you pay with money from these PPP loans can be deducted from your taxable income.[5]

• Unemployment Benefits

  - Those who received unemployment benefits will need to pay income taxes on that amount.[1] If you choose not to have taxes withheld from your benefits, you’ll either have to pay quarterly estimated taxes, or set aside enough funds to cover the taxes.

• Educational Expenses

  - Any money you withdrawal from a 529 Plan or Educational Savings Account (ESA) must be used for qualified educational expenses to be considered tax-free. If any of your classes cancelled and refunded any 529 or ESA money, you have 60 days to put the money back into the account or use it for educational expenses to avoid paying income taxes and a withdrawal penalty.[1]

Sources:

[1] Tax Season 2021: What You Need to Know, Dave Ramsey

[2] Steps to Take Now to Get a Jump on Your Taxes, IRS

[3] Tax Deductions Guide and 20 Popular Breaks for 2020 and 2021, NerdWallet

[4] Charitable Contribution Deductions, IRS

[5] Eligible Paycheck Protection Program expenses now deductible, IRS