Avoid These Hiccups On Your 2020 Taxes
Dear Rich Lifer,
Much in our day-to-day life changed in 2020, so it should come as no surprise that filing your tax return will also be different this year.
Because of coronavirus, there are many new and revised provisions that you should know about before you file your 2020 taxes.
Things like stimulus payments and unemployment income are adding additional stress and uncertainty when it comes to completing your taxes correctly.
Since the first day to file your taxes was last Friday, we decided that today, we will walk through some of the most important things you need to know so you can avoid any hiccups with your tax filings.
What Is The Timeline For Filing?
The IRS will begin accepting federal tax returns on Friday, February 12. Yes, this date is later than usual, as the IRS usually begins accepting returns at the end of January.
The IRS said this shift was needed to allow the agency to update and test its systems to reflect late-year tax changes approved by Congress, including the second round of economic stimulus payments.
IRS. commissioner, Charles P. Rettig said, “This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible.”
This delay is not expected to change the timeline for getting a refund if you are due one. If you file electronically, the IRS says you should expect your refund within three weeks of filing.
If you are interested in assessing when your refund will arrive, you can always check out the IRS tool Where’s My Refund within 24 hours of filing electronically.
Despite the beginning of filing being pushed back, as of now, the traditional due date of April 15 still stands as the last day to file and pay your federal income taxes.
If you miss this date, you will likely face late payment penalties therefore, you could consider filing for an extension if you have concerns about the deadline. To do so, you will have to submit a request to the IRS by April 15.
However, while the extension will give you six extra months to file your 2020 federal income taxes, you will still be expected to pay any remaining federal taxes owed on your 2020 income by April 15.
Are Stimulus Payments Taxable?
Long story short, no, the stimulus payments are tax-free.
However, this doesn’t necessarily mean they won’t affect how you file your taxes because some people who were eligible for the payments did not receive them. There are multiple reasons you may have missed one or both of the stimulus checks. Maybe your 2019 income was higher than your 2020 income. Maybe you didn’t file a tax return for 2018 or 2019.
Regardless of the reason, you will be able to receive any money you think you are entitled to via your federal tax return if you claim a refundable Recovery Rebate Credit.
The credit will be given in the same amount as the stimulus payment you are eligible for. Refundable credits reduce your tax liability dollar-for-dollar. If a credit exceeds your tax liability, the rest will be sent to you as a refund.
It’s also worth noting that filing sooner rather than later will be beneficial because of the pending third stimulus payment that is currently being negotiated. The new stimulus plan will likely include $1,400 relief payments for individuals making $75,000 or less and $2,800 payments for couples making $150,000 or less.
There is an expectation that Congress may pass the next relief bill by mid-March.
This means the IRS would start distributing the third stimulus check in the middle of tax season, which could affect how much you receive — especially if your households lost income last year or you had a child in 2020.
If you are not able to file your tax return before a deal is reached on the stimulus bill, the IRS will rely on your most recent tax return, which may not reflect income loss or the economic crisis faced over the last year.
Lisa Greene-Lewis, a tax expert at TurboTax says:
I would suggest that people file as soon as possible, especially with 75% of taxpayers last year receiving a tax refund close to $3,000. We are hearing a lot of people say, “I had a baby in 2020, how will the IRS know this? When they issued the previous stimulus payment they didn’t know that.”
If you were lucky enough to have your income increase in 2020, waiting to file your tax return might be a more financially savvy move.
What About Unemployment Benefits?
Unemployment benefits are considered taxable income by the IRS and by most states — with the exceptions of Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington and Wyoming.
If you choose not to have taxes taken out of your unemployment payments, what you ultimately owe will be assessed when you file your tax return.
However, if your income was very low in 2020 due to job loss or any other reasons (2020 gave us plenty), it’s unlikely you will be forced to pay back a large chunk of change. Instead, you will see your refund reduced by the amount of income taxes you owe on your jobless benefits.
Are There Other Tax Credits I Should Know About?
Yes! Congress made many changes to tax benefits over the past year due to coronavirus.
One such change is the Earned Income Tax Credit, which is geared toward rewarding work for low-and-moderate-income filers. The eligibility for this credit has to do with your income levels and your number of children. It is worth up to $6,660 for married couples with children and up to $538 for single, childless filers.
Additionally, small business owners who paid business expenses using money from a Paycheck Protection Program loan that was forgiven may still deduct those expenses on their federal tax return as if they paid for them out of revenue.
Another tax credit regarding charitable donations was introduced this year. As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, lawmakers created a special one-time deduction to encourage other Americans with some spare cash to make donations this year. So if you made a charitable donation before December 31, 2020, you may claim that contribution.
These are just a few of the new tax credits that can be taken advantage of this year, so make sure you pay extra care when filing to ensure you are only paying what you owe and are getting the largest refund possible.
To a Richer Life,
The Rich Life Roadmap Team