10 tax tips for completing your 2020 tax return
Internal Revenue Service says taxpayers should expect limited face-to-face transactions, high call volume and paper processing delays as it opens today for tax season 2021 , accepting tax returns for the 2020 tax year. And then there’s all the tax related to the pandemic law changes to consider. Here is a guide to some key questions.
File electronically and use direct deposit. The IRS says tax returns and paper checks will be even longer this year. One in five taxpayers do not get their tax refund by direct deposit. You can provide routing information for up to three accounts, even retirement accounts, on your tax return, to which the IRS can send your refund. “I cannot stress enough the importance of filing electronically and choosing direct deposit. It’s the safest and easiest way to file an accurate tax return and get a refund, ”said Ken Corbin, IRS Taxpayer Experience Manager. Taxpayers have until Thursday, April 15 to file their returns and pay any taxes owed. (March 17 update: IRS announced a new tax deadline of May 17, 2021 for individual declarations 2020.)
Stimulus payment adjusts. Most taxpayers have received two economic impact payments in series 1 and 2. If you qualify and have not received a payment or think you are entitled to more than you received, you can claim Recovery rebate credit on your 2020 tax return. For example, if your income was lower in 2020 than in 2019, you may be entitled to a partial credit. Or, if you were reported as a dependent on someone else’s tax return in 2018 or 2019 but will not be for 2020, you may be eligible for the credit.
401 (k) distributions related to Covid-19. If you made a CARES Act 401 (k) or IRA distribution in 2020 under the relaxed rules to mine your 401 (k) without penalty, you can report all income on your 2020 tax return or in equal installments over three years . Alternatively, you can put the money back into a retirement account and negate the tax consequences of the distribution. For more details, see the new IRS Form 8915-E and Instructions. Note: The distribution rules for the enhanced pension plan were not extended for 2021 in the 2020 year-end tax package. He clarified that defined contribution pension plans were eligible for the special rules. “People were disappointed that the Covid-related relief was not extended for 2021,” said Lisa Loesel, benefits lawyer at McDermott Will & Emery in Chicago. “Now we’re back to standard hardship rules and standard plan lending rules. “
Unemployment benefits are taxable. (Update: Congress has made up to $ 10,200 in tax-free 2020 unemployment benefits for some taxpayers under the latest Covid relief plan). This includes basic state benefits as well as the additional weekly CARES benefits of $ 600 in the event of a pandemic. You should have received a Form 1099-G showing the amount paid to you and any federal income taxes withheld. If you didn’t get a 1099-G, visit your state’s unemployment compensation website to access it. Some states grant tax breaks for state tax on unemployment benefits.
Concerts are taxable. If you got a side job during the pandemic, you must include it on your tax return as self-employment income. The rule of thumb is this: individuals must file an income tax return if they have net self-employment income of $ 400 or more from working together, even if it is a secondary, part-time or temporary job. If you have self-employment income, be sure to keep track of deductible expenses related to your work, and if you’ve set up a home office, you may be eligible for the home office deduction.
Discover the new charitable deduction for 2020. If you made cash donations to charities in 2020, there is a new $ 300 charitable donation deduction above the line per tax return. This means that even though, like most taxpayers, you take the standard deduction and don’t itemize the deductions, you can take advantage of the $ 300 charitable deduction. Warning: “These gifts must be justified,” says Conrad Teitell, tax lawyer at Cummings & Lockwood in Stamford, Connecticut. The justification rules for cash gifts from retailers also apply to non-retailers. You need proof of your donation. For gifts under $ 250, credit card statements or canceled checks will serve as a receipt. For donations of $ 250 or more, you need written acknowledgment from the charity. (Note for planning charitable giving for 2021: There is a new tax deduction of $ 600 for charity for 2021.)
Save for retirement by maximizing your 2020 IRA. You can make contributions for the 2020 tax year to an individual retirement account until April 15, 2021 and receive a tax deduction if you qualify. For 2020, the limit on annual contributions to an IRA (pre-tax or Roth or a combination) is $ 6,000, plus a $ 1,000 catch-up contribution allowed if you are 50 or older. For 2020 and later, there is no age limit for contributing to the IRA. If you are self-employed and have more room for retirement savings, you can still open and fund a SEP-IRA for 2020 until April 15.
Save for health expenses or retirement by maximizing your HSA. If you have a high deductible health plan, you can contribute to a health savings account and get a triple tax advantage. The money goes pre-tax, grows tax-free, and comes out tax-free if you use it for qualifying health care expenses. Typically, you contribute through salary deferrals, but you can supplement your annual contribution for the previous tax year up to the tax filing deadline. This means that you can make contributions for 2020 until April 15, 2021. For 2020, the maximum amount of contributions is $ 3,550 for individual coverage or $ 7,100 for family coverage, plus a catch-up of 1,000. $ if you are 55 or older. If you withdraw money for purposes other than health care, you will have to pay taxes, plus a 20% penalty if you are under 65.
Check the IRS Where is my refund? tool. Most refunds are sent within 21 days of electronic filing. If you’re expecting a refund and want to know when you might get it, the Where’s my refund page? The tool on the IRS website allows you to enter your name, deposit status, and refund amount to check the status. A personalized refund date should appear 24 hours after your electronic filing. For early declaration taxpayers claiming the income tax credit or supplement child tax credit, the tool should be updated by February 22 (they should see refunds by the first week of March).
Adjust tax payments for 2021. If you got a refund, especially a large refund, you can use the IRS withholding tax estimator to determine how much tax to withhold from your paycheck. Then fill out a new W-4 withholding allowance certificate, and you’ll get more in every paycheck, instead of basically loaning it to Uncle Sam. On the other hand, if you owe a lot at tax time, you may need to make estimated tax payments for 2021. The estimated tax due date for the first quarter of 2021 is April 15, 2021. (Update March 17: this deadline has not been extended!)