For millions of US consumers, this tax filing season might bring some hassle. As a taxpayer, you want to save more money on your tax bills while also benefit from your tax returns. However, stimulus checks and unemployment benefits have introduced some important particulars that taxpayers should consider when preparing taxes in 2021. What other changes to expect this tax season?
PissedConsumer has interviewed tax experts, CPAs, and financial advisors, to get the best answers to the most important questions about tax filing 2021. In this article, you’ll uncover expert tips about tax regulations, stimulus checks, tax returns, unemployment benefits, and more insights from tax professionals.
Tax Experts Interviewed by Pissed Consumer:
Top Tax Filing Questions Answered:
- What are the main tax regulations in the US?
- What are the changes in filing taxes in 2021?
- How did Covid-19 impact the tax regulations?
- Can you claim missing stimulus money on a tax return?
- Is unemployment taxable?
- How to file 2020 tax returns?
- What tax software to use?
- Typical mistakes with tax returns
- Top tax filing tips
What Are the Main Tax Regulations to Follow in the US?
John Pontius: Title 26 of the United States Code is the Internal Revenue Code which is the primary source of federal tax law in the United States. The Treasury Department has delegated tax administration to the Internal Revenue Service (IRS). The IRS issues administrative guidance in order of authority via Treasury Regulations, Revenue Rulings, Revenue Procedures, Notices and Announcement, Forms and Instructions, Publications and FAQs. In addition to federal taxation, each state and local government have their own tax jurisdictions. Tax law is also created through litigated cases in federal and state courts. Taxpayers are required to report all gross income unless an except applies.
What Are the Changes in Filing Taxes in 2021?
George Birrell: There are some changes to taxes in 2021. Some changes may be state level, so I won't go into those as it's best to find out what changes are specific to the state you reside in. In terms of general changes, there will be an increase in standard deductions. The new amounts are as follows: $12,550 for single taxpayers (a $300 increase), $18,800 for heads of households (a $150 increase), and $25,100 for married couples filing joint returns (also a $150 increase). There'll also be the addition of a higher tax bracket, although the same tax rates will apply.
Chris Abrams: Make sure you use the new standard deduction. It might seem standard, but you’d be surprised to learn how many people forget this very important step.
Another thing to keep in mind is any early withdrawals from retirement plans. The government provided much-needed relief this year by cancelling tax penalties on early withdrawals from 401(k)s and other retirement plans.
While the cancellation applies to 2020 taxes, you’ll eventually have to pay tax on the withdrawals. The IRS currently requires taxpayers to pay back this tax within the next three years. You can certainly delay this payment until later, but it’s important to make a repayment plan. You don’t want to be on the hook for an unexpected tax liability down the road.
Jerry Zeigler: The big topic tends to be the stimulus payments, the economic impact payments, the IRS calls them. They aren't taxable, so that's the first thing. So they're not taxable, so when your tax software or your tax professional asks, "How much stimulus money did you get?" They're not asking because they're going to tax that money. They're asking to make sure you got the amount you were supposed to based on your 2020 return. So the previous payouts are either based on your 2018 or 2019 return for most taxpayers.
How Did Covid-19 Impact the Tax Regulations?
John Pontius: On March 25, 2020, the IRS announced the People First Initiative (IR-2020-59). This Initiative provided taxpayers experiencing Covid-19 hardships with a relief of certain collection actions and processes from April 1, 2020, through July 15, 2020.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020. The CARES Act provided $2 trillion in economic stimulus. Last year the IRS issued approximately 160 million payments from the first round of Economic Impact Payments (EIPs), totaling over $270 billion.
Eligible taxpayers received EIPs of $1,200 if single and $2,400 if married filing jointly with $500 for each qualifying child. On November 2, 2020, the IRS announced several important changes to help struggling taxpayers impacted by Covid-19 to settle their tax debts more easily with the IRS (IR-2020-248).
The Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) was passed in late 2020. Over the last month, the IRS has issued a second round of EIPs to eligible taxpayers of $600 for single and $1,200 for married couples filing a joint return with $600 for each qualifying child.
The IRS has not extended the time to file and pay related to tax year 2020.
Can You Claim Missing Stimulus Money on a Tax Return?
Nesha Pai: Yes, it will be in the form of a credit. Tax filers can “recover” these payments by claiming the Recovery Rebate Credit when they file their 2020 tax return.
The Recovery Rebate Credit is a new tax credit for the year 2020. It’s a dollar-for-dollar credit for people who didn’t receive the right amount of money from their stimulus check. For example, a couple who filed without dependents in 2019 likely received a $2,400 check in April. If they gave birth to a baby in 2020, they could claim the additional $500 via the Rebate Recovery Credit.
John Pontius: Eligible individuals who did not receive the full amounts of both Economic Impact Payments (EIPs) may claim the Recovery Rebate Credit on their 2020 Form 1040. Individuals must file Form 1040 to claim a tax refund even if they normally are not required to file a tax return.
Is Unemployment Taxable During the Coronavirus Pandemic?
Jerry Zeigler: Quite a few individuals are run into thought their unemployment with the federal boost in unemployment payments was not taxable, but it most definitely is. So, I do hope most people did the appropriate amount of withholding for that. On a federal level, it's taxable. On a state level, it depends on the state. Some states require you to pay taxes on the unemployment that they give you and some don't. But that one could cause quite a few individuals to owe more in taxes than they would otherwise, and it could cause them to have lower returns or even owe money.
George Birrell: The simple answer is yes, unemployment is taxable during the pandemic. But as with most things when it comes to tax, it's more complicated than a simple "yes" or "no" answer. When it comes to the government Coronavirus Aid (i.e. the additional $600 per week you've been getting), this is considered taxable income.
If you don't pay careful attention to this and put aside money from these weekly payments, you could face an issue come tax time. When it comes to receiving unemployment benefits from a private fund that you contribute to, however, you may not be subject to unemployment tax if the amount you receive does not exceed the amount you contributed.
How to File 2020 Tax Returns?
Nesha Pai: You can use free tax software like FreeTaxUSA or download forms from the IRS website if you want to do them manually. Also, CPA firms are there to help file for you and take the hassle away. For individuals, they will need to file 1040.
John Pontius: The IRS Fee File Program is available for anyone with an income of $72,000 or less. The safest and fastest way to get a tax refund is to electronically file with direct deposit to the taxpayer’s bank account. The IRS is taking longer to process paper tax returns and is processing all mail in the order it was received.
The IRS does not recommend filing a second tax return or call the IRS to check on the status of a tax return. Taxpayers can log into their federal tax account via the IRS webpage to view their account history. This is the fastest way for a taxpayer to review his or her compliance history. Through their account portal, they can also view the amounts of the EIPs. Also, the IRS website has the online tool for taxpayers to track their refund status.
What Tax Software to Use for Filing?
Jerry Zeigler: What you can do is go to IRS.gov, look for Free File… Several other software providers in there are major companies… There are certain forms they have to provide for free, and you can look at each one and see what forms they do provide for free ahead of time before you start the software or start doing your return... Some of those also cover some States for free as well. So you could get a return fully done for free by doing that.
The other option for free filing is what they call VITA, Voluntary Income Tax Assistance… Many of those are shut down this tax season, some of them have gone virtually, and some of them do a drop-off service… The VITA is good if you want to sit down and talk with someone.
If you're going to go pay for using software, the major name brands tend to be pretty good and accurate. They got a lot of support… TurboTax, H&R Block, TaxAct - all of those have support for you.
What Are the Typical Mistakes with Tax Returns?
Chris Abrams: One of the most common mistakes people make is automatically taking the standard deduction. While it makes filing taxes easy, taking the standard deduction could end up costing you money. I recommend calculating your allowable expenses to see if itemizing deductions will exceed the standard deduction. Many online filing systems can help you do this in a matter of minutes, so it’s well worth the effort.
Many people also get so overwhelmed with tax credits and deductions that they avoid them altogether. Few taxpayers take advantage of deductions on things like sales tax, charitable donations, and health care premiums.
Likewise, there are many tax credits available that can help the average taxpayer maximize their refund. For instance, the Child and Dependent Care Credit and American Opportunity Tax Credit can help families offset the costs of daycare and higher education.
Jerry Zeigler: The IRS says one of the most common errors is still if you have to mail something in whether it's a tax return or some follow-up form, the most common error is actually people still not signing the documents, which may seem odd, but that is a common error still, according to IRS.
Top Tips Shared by Tax Experts
George Birrell: Firstly, you should find out if you qualify for a home office deduction. This can help you a lot when it comes to deductions but not everyone qualifies for this. Secondly, you may benefit from Earned Income Tax Credit (EITC). If you do qualify as a result of your income, your required taxes may be lower and you may get a substantial refund in certain situations. Thirdly, if you want the process to be easier, safer, and faster I'd suggest filing electronically and opting for a "direct deposit". Lastly, if you're confused at any point in the process, contact a tax professional - that's what we're here for after all.
Nesha Pai: Keep a file folder (physically and/or electronically) at the start of the year and dump anything that is potentially a taxable situation (income or deduction) into it all year long.
Chris Abrams: My best word of advice? Enlist the help of a tax expert. While many people are reluctant to spend extra money on tax help, doing so could have a major impact on your return.
An accountant or financial advisor will ensure you limit your liability and maximize your refund opportunities. Their fee is a small price to pay for getting the money you deserve.
Jerry Zeigler: I think the key to a lot of this stuff, both in taxes and finances is just devoting some time to think about it. A lot of people just don't do that. So devoting some time to think about it and think about what's best for you and your family.
Tax preparation and tax filing are important, it takes time, much consideration, and effort but in the long run, and if done properly, it rewards you with sufficient returns. To avoid making mistakes and penalties do thorough research, check IRS updates, and follow professional advice.
We thank all our tax experts for their time and for sharing these useful tips with consumers. To learn more about tax season 2021, watch this video interview with one of the above-quoted financial experts, Jerry Zeigler. Uncover details about tax filing, tax scams, and tax software.
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