As you read about the changes that are happening this tax season, you’ll learn:
- You have extra time to get your taxes filed, and the standard deduction has been increased.
- Many of the deductions and credits you were previously familiar with have been tweaked in some way and often to your benefit.
- Issues such as unemployment and stimulus checks have made filing taxes difficult to handle on your own.
The year 2020 was unique in several ways, and while we’re all ready to put it behind us, there is one pressing issue we still have to face: taxes. While tax season brings the same old issues with it, some new things came up for consideration for the 2021 tax season.
The Big Changes
You need to understand what some of the biggest changes have been if you are to be successful in filing your taxes. First, with the date that the IRS began accepting returns being pushed back to February 12, the deadline to file all federal taxes has been pushed back from April 15 to May 17. This gives you more than a month of extra time to get the job done.
Second, there was an increase in the standard deduction. Single filers have a standard deduction of $12,400, while those with a married filing jointly status have a deduction of $24,800. Those who are married filing separately also have a $12,400 standard deduction, and head of household filers have a standard deduction of $18,650.
Possible Deductions and Credits
In preparation for the 2021 tax season, you’ll want to know details about deductions and credits. First off, what are they?
- Deductions – These are items that lower your taxable income. Some are only available to those who have itemized deductions, and others are available to anyone, including those who take the standard deduction.
- Credits – A credit is an amount of money that gets taken from your tax bill. There are refundable credits and nonrefundable credits. When everything has been totaled and a refundable credit is higher than what you owe, you receive a refund. If a nonrefundable credit is higher than what you owe, you won’t get a refund, but you won’t owe anything, either.
Next, you should strive to understand what the different deductions and credits are. Claiming these on your 2020 tax return could help you save money and even get some back. A handful of those includes the following.
Last year saw a lot of people start working from home, but not all of them can claim the business deduction. It only applies to those who are self-employed. Expenses you could claim are the home office deduction, travel expenses, and other ordinary but necessary costs. If you were just told to work remotely from the corner of your bedroom, but you’re still employed by someone else, you can’t claim this deduction.
Last year also saw a lot of extra giving. People were helping others in communities around the world who suffered greater losses due to a variety of issues that swept the globe. The CARES Act states that you can deduct up to 100% of your AGI if you plan to itemize deductions. If you’ve decided on the standard deduction, there’s good news for you as well. Up to $300 can be written off for other cash contributions you made.
Good news for families with children! While it may have been a difficult economic year, up to $2,000 can be claimed per qualifying child, which is a refundable credit. Looking ahead to next year’s taxes, this number is set to increase to $3,000 or $3,600 depending on how old the child is.
As a small business owner who has employees, you may qualify for the Employee Retention Credit. This allows you a 70% credit of up to $10,000 for each qualifying employee’s quarterly wages. This means the maximum credit would be $7,000 per quarter per employee.
The medical industry was hit hard over the last 14 months. If you or someone in your family was a patient that contributed to that, you could have a medical expenses deduction above 7.5% of your AGI.
If you were eligible but did not receive an Economic Impact Payment, you could claim a Recovery Rebate Credit. You could also claim this credit if you received a payment, but it should have been larger than what the check was for.
How Recent Retirement Plan Changes Could Affect Your Taxes
There were three serious changes recently to retirement plans, and they may affect your taxes. They include:
- Traditional IRA contribution age limit – Money you contribute to a traditional IRA is tax-deductible. The SECURE Act allows you to continue contributions beyond age 70.5 as of last year, which could lower your taxable income. When you take money out of your traditional IRA, however, it will be taxed.
- Avoiding early withdrawal penalties – Individuals under the age of 59.5 are allowed to withdraw up to $100,000 of their IRAs and 401(k)s without early withdrawal penalties. With the way the economy went last year, this could have been something you had to resort to. The problem lies in taking money out of traditional 401(k)s and IRAs that are taxed just like typical income, so you will be paying taxes on those withdrawals.
- Skipping required minimum distributions – A required minimum distribution is the age at which you must take money out of your traditional IRA. Last year, the SECURE Act pushed the age back to 72 years old, and the CARES Act allowed seniors to skip required minimum distributions. This gave those retirees a big tax break because they didn’t have to report the withdrawal as taxable income.
How COVID-19 Is Making a Mess of 2020 Taxes
Unfortunately, with all of the changes and all of the negative events from 2020, some people have begun to realize their tax situation is messy. For example, several people lost their jobs and became eligible for unemployment benefits. Unemployment income has to be reported on your taxes, and not many people realize that. Something else they may not realize is taxes are not automatically taken out of an unemployment check. This could be a problem if all of that income was already spent, and now the individual owes taxes.
Did you get your stimulus check? If so, you don’t have to pay taxes on it, confusing many taxpayers. If you haven’t received a check yet, you can claim the Recovery Rebate Credit discussed previously. The IRS is actually recommending that individuals who don’t normally file taxes but who have not received any stimulus cash should file and claim the Recovery Rebate Credit.
Contact Our Law Office To Discuss Your Tax Situation
As you can see, the 2021 tax season has been stressful for a lot of taxpayers. At the Law Office of Lance R. Drury, we want to help ensure you are compliant with tax laws and don’t lose money that you overpaid on taxes during the last year. Whether your tax return is delinquent, you’re facing an IRS audit, you unlawfully avoided paying taxes, or you need help with a refund claim, we can help. Contact us today to discuss your specific needs and so you can get through this tax season with as little stress as possible.