2020 was an unpredictable year…but filing your taxes doesn’t have to be an unpredictable experience! Allowing yourself ample time to prepare your tax return is crucial to ensure you are remaining compliant with IRS and to ensure you are maximizing on your potential refund. After the craziness of COVID-19 taking over 2020, many of our lives have been impacted financially. From receiving unemployment to receiving a stimulus check—many of us have new scenarios we may face when filing our taxes.
Preparing your Taxes
The 2021 tax season has officially begun as of February 12, 2021. The IRS is now accepting returns. Although the pandemic has brought on new financial situations for many Americans, there is still basic information you must gather and prepare before filing for taxes.
1. Chose How you Will File-Reflect back on your year when deciding how you will file your taxes. Maybe you are experienced and feel comfortable filing your own taxes with tax software or you may wish to meet with an accountant or CPA. Consider how much assistance or representation you may want or need when deciding.
A. Whether you use an accountant or you complete your taxes yourself, it is always recommenced to e-File. E-Filing will ensure your tax return is processed more efficiently resulting in your refund (if applicable) much sooner than mailing your taxes in.
B. Another decision to make when filing your taxes is to determine if you are filing individually, jointly as a married couple, and if you are claiming dependents.
2. Gather your Documentation-It is important to ensure you have all of the necessary information on hand to complete your tax return accurately. Common documentation and information includes:
C. Personal Information-Social security numbers, W2s,1099’s, mortgage statements, and interest statements.
COVID-19 Tax Changes
With the pandemic causing turmoil to millions of individuals across the world, the United States came out with several relief packages to help aid Americans. The CARES Act was established in response to the pandemic in order to assist working and nonworking individuals, small businesses, and families financially.
3. Stimulus or Economic Relief Payments-These relief checks are tax free! You do not have to pay any taxes on this income. There were two rounds of stimulus checks issued to Americans. These payments were issued to individuals making less than $75,000 a year according to their 2019 tax returns. Claiming dependents also increased the amount of your credit.
• It is important to review your received relief payments for accuracy. Some Americans may not have received a stimulus payment if they didn’t file a tax return for 2019. Also, if a birth of a child occurred in 2020 and is a qualifying dependent, you are eligible to receive a stimulus payment for them. However, because the new dependent was not listed on your 2019 tax return, the IRS did not send you the funds for that dependent. When filing your 2020 taxes, you can complete a “Recovery Rebate Credit” to get the missing funds.
4. Unemployment-A benefit of the CARES Act is that it allows you to extend your unemployment benefits if needed. It is important to know that unemployment funds are taxable much like other earned income. If you applied for unemployment, you had the option of withholding taxes. If you haven’t paid taxes as part of each unemployment payment, then this will need to be paid in a lump sum on your 2020 tax return. You will receive a 1099-G if you received unemployment. Refer to this when completing your taxes, or provide this to your accountant along with your other important documentation.
5. Earned Income Tax Credit-The EITC credit was another program that was created to assist low to middle class income households. Depending on how much money you made during the year and if you are single or married with children, you may qualify for the credit. The credit ranges from $538 for single individuals and goes up to $6,600 for married couples with dependents, children, or disabilities.
• The IRS has stated couples or individuals who file for this credit may have a delayed refund.
• To see if you qualify for this tax credit, you can speak to your accountant or visit the IRS EITC webpage where you can determine your eligibility.
6. Paycheck Protection Program for Small Businesses-Small businesses may have been eligible for the Paycheck Protection Program or PPP loan which helped businesses keep their employees employed. If you are a small business owner that took advantage of the PPP program your loan may have been forgiven. If your loan was forgiven, then your loan is 100% tax free.
• Expenses paid using funds from your PPP loan may also be tax deductible. Keep all qualifying receipts or invoices for your tax return.
Your CPA or accountant will be able to better assist you with filing your taxes if any of these circumstances apply to you. However, you can also view the IRS or SBA website for FAQs and resources.
Other Life Changing Events
In addition to the COVID-19 tax scenarios, there are other major life events that could occur throughout the year that are common to report when filing taxes. Some of the life events listed below can actually help maximize your potential refund.
7. Marriage or divorce
8. Birth or adoption of a child
9. Job changes or job loss
10. Bought/sold a home
11. Attended college/university expenses
2020 was a year of uncertainty, chaos, and new challenges for millions of Americans. With the help of the government and IRS, a variety of relief programs were granted to small business owners and individuals to help alleviate a small portion of the 2020 havoc. With the tax season officially open for business, it is important to review how the COVID relief plans may impact your tax return. Review the IRS website, or consult with your accountant to ensure you have the most up to date information to maximize your return. COVID has taken control of our lives over the past year. Take back that control by knowing your tax return is completed efficiently and accurately.