7 Tax Tips for a Turbulent Tax Year
2020 is in the rearview mirror, but your income taxes for the unprecedented year are due soon. Here are some tips.
The COVID-19 pandemic affected everything last year, including our health, employment, travel and entertainment, and social activities. It had impact on income taxes, too. Your 2020 Form 1040 had to be modified to reflect the events of the last year and the provisions in the CARES Act, in addition to the usual tax law changes.
While the IRS incorporated it all into your tax forms and schedules, you need to be a little more vigilant this year as you’re preparing to file. Here are some tips that can help ensure that you present your tax-related finances accurately and thoroughly in your 2020 return.
1. Comply with unfamiliar tax laws if unemployed or working side gigs
If you were one of the many workers who lost a job or had hours severely curtailed, your taxes are likely to be more challenging than usual this year. Here are some of the issues.
- Unemployment. Yes, unemployment compensation is taxable. If you didn’t have taxes withheld, you may end up owing the IRS. Consider having taxes withheld and/or making quarterly estimated tax payments to avoid the same fate in 2021.
- Health insurance premiums. If you had to start paying for your own health insurance, you can deduct your premium costs on the Schedule 1, which feeds into the Form 1040. If the total of all of your medical expenses exceeded 7.5 percent of your adjusted gross income (AGI), you can take a deduction on the Schedule A, but don’t report health insurance premiums in two different places.
- Schedule C. Did you take on work as a self-employed individual, even a side gig like driving for Uber? You’ll have to file a Schedule C to report your related income and expenses – more than one if you had multiple businesses.
- Earned Income Credit. You may be eligible for this now even if you never were before because you made too much money.
- Gift taxes. Did you receive financial help from friends of family? You won’t have to pay taxes on those gifts unless they, for example, accrue interest.
2. Use the correct filing status
Also, be sure to sign your return. Report all income. Check your math. Double-check your name and address, especially if either has changed. These are some of the most common errors the IRS encounters, and they can result in a delayed refund or even penalties.
3. Consider itemizing
It’s certainly easier to claim the standard deduction than to itemize. But if you’ve been impacted financially by COVID-19, your income may be down and your deductions and credits up. Look closely at credits and deductions for dependents, education, and home ownership. Consult this IRS page to see how life events like marriage or divorce, new job or loss of one, and disasters and casualties can affect your income taxes.
Tip: You can now claim a deduction for up to $300 in charitable cash donations to qualified organizations, even if you don’t itemize.
4. Claim your Recovery Rebate Credit
If you were eligible for but did not receive one or both of your Economic Impact Payments (COVID-19 stimulus payments), you can get credited for the amount(s) you missed on your 2020 tax return. These payments are not taxable.
5. E-file and use direct deposit for refund
This is the fastest, most secure way to get your refund. You can track its progress at the IRS site Where’s My Refund?
6. Beware of scammers
Income tax season always brings out the scammers. If you received a Form 1099-G reporting unemployment compensation you didn’t receive, contact the state agency that issued it and tell them that you didn’t file the claims. They should send you a revised form, but if they don’t do so before you file your taxes, the IRS says you can file anyway and report only any payments you actually received. Document your attempts to get this straightened out. Visit the IRS’ Identity Theft Central page to learn about how to deal with the identity theft.
If you hire someone to prepare your taxes and he or she will not sign your return, you’re being scammed. By law, legitimate income tax preparers must have a Preparer Tax Identification Number (PTIN) that they include on any returns they file. These “ghost” tax return preparers may also require cash and not provide a receipt, and they might want any refund to be deposited into their own account first instead of directly into yours.
7. Consider expert help
We’ve referred you to some IRS websites here. You can be assured of accuracy if you refer to them, but the agency’s language is not always user-friendly. We can help you prepare your taxes for 2020. You may be struggling with them if you’ve experienced major life events or have been affected financially by COVID-19. Contact us to schedule a consultation, and we’ll help ensure that you report everything that the IRS allows.
SOCIAL MEDIA POSTS
Did you take on a side gig or gigs in 2020? You’ll have to file a Schedule C for each business. We can help with this.
Unemployment compensation is indeed taxable. If you end up owing on your 2020 taxes, we can help you avoid that in 2021.
Did you miss getting one or both stimulus payments? You can take a credit for these funds on your 2020 tax return. Ask us how.
There’s a lot of disinformation about income taxes online. Be safe when you’re preparing and filing. Contact us if you want assistance.