Tax Season Tune-Up
While we don't know when the restrictions of the pandemic will fully end, it doesn’t mean put your head in the sand when it comes to your finances. Let’s go over things you should take a look at during this tax time and beyond.
First, here are the main things you need to know right off the bat for the 2021 tax season:
- Tax Day was Thursday, April 15, 2021 but the recent billed stimulus package pushed back the due date by 30 days. You must file your 2020 tax returns by the new date which is May 15th!
- 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.
As tedious as tax prep can be, you're best served by knocking it all out in one go. Set aside a day to organize your paperwork and file both your federal and state taxes. Organize your tax forms now. In addition to your W-2, you may have W-9s from any self-employment or contracting income, along with forms related to health coverage, interest paid on student loans, or earnings from interest-accruing savings or investment accounts.
Ask For Help
When it comes to tax season, there are a few different ways to prepare. You can file on your own, try using tax software, or hire a tax preparation service. If your tax obligations are simple, save some money and skip the professional tax prep. However, if you find yourself uncertain about a number of deductions and expenses, ask for help so that you're on the safe side. You also may qualify for free tax prep assistance if your income falls below a certain threshold or if you're military personnel. Fortunately, you can deduct your tax preparation expenses, which should soften the financial blow of hiring a professional.
The Coronavirus and Your Taxes
Unfortunately, the coronavirus (and the government’s response to it) has created a ripple effect that will be felt when you sit down to file your taxes for last year. Here are some things to keep in mind:
As part of the Coronavirus Aid, Relief, and CARES Act’s $2 trillion relief package, the government sent stimulus checks up to $1,200 shortly after the pandemic shut most of the country down.
The bright side is your stimulus check won’t count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020.
Via the IRS : “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer's refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs."
Paycheck Protection Program (PPP) Loans
The CARES Act also tried to help struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on certain business expenses such as payroll, rent or interest on mortgage payments, and utilities, these loans were designed to be “forgiven.”
In December 2020, the IRS announced that any eligible expenses you paid with money from those PPP loans can be deducted from your taxable income. So that’s a little bit of good news! But remember, you’ll have to get your loan forgiveness application approved by the Small Business Administration before you’re off the hook for the amount you borrowed.
If you received unemployment benefits, like most of us did, unfortunately you will need to pay income taxes on that money. If you chose not to have taxes withheld from your benefits when you signed up, then you’ll either have to pay quarterly estimated taxes or set aside enough money from your unemployment benefits to pay your taxes come Tax Day.
At the time of this writing the government just passed a new stimulus package that will have direct effects on this tax season. How much stimulus money will remain untaxed along with the number of COVID-19 related elements will need to be considered as you file. Make sure to do your due diligence if you self prepare your paperwork or consult a professional with any questions you may have.
Written By Marc J. Kelly