What You Should Know About Your Taxes

Your 2021 Tax Prep Guide

Each year roughly 75% of American households pay federal income taxes.¹  In fact, in 2019 alone, the IRS received approximately 141 million individual income tax returns.2  Although filing taxes can be straightforward, in many cases, it’s not always a fun process. There’s a lot of paperwork involved, such as a W-2 forms, 1099 statements, and receipts.

Additionally, there have been some changes to the 2021 tax season that you’ll need to account for when preparing your taxes.

In this guide, we’ll go over some things you should know about filing your 2020 tax return. We’ll cover tax deadlines, major changes to the 2021 tax season (when you file your tax return for 2020), filing taxes as a self-employed worker, and much more.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.

What You Should Know About Your Taxes: Some Basics

When are taxes due for 2021?

The deadline to file individual tax returns for 2020 is May 17, 2021.² If you can’t file your taxes by the May deadline, you can request an extension by filling out and submitting Form 4868 before the deadline.  Note, an extension of time will not grant an extension of the time to pay any taxes due.  The IRS recommends estimating and paying any owed taxes by the regular deadline to avoid possible penalties.³ It is always a good idea to get an early start on preparing your taxes. The IRS typically accepts electronically filed tax returns starting around mid-January, although in 2021 this process was delayed until February 12.

What happens if you don’t file your taxes on time?

You should always try to file your taxes on time. Failure to file your taxes can result in fines and penalties that will compound over time. If you owe the IRS tax payments, and you are unable to pay, the IRS allows you to request an additional 60 to 120 days to pay your taxes by setting up an online payment plan with the IRS.⁴ In 2020, the IRS announced several changes to help taxpayers struggling to pay tax debts, including providing up to an additional 180 days to pay your taxes and allowing certain qualified taxpayers who owe less than $250,000 to set up Installment Agreements without providing financial substation.⁵

How Do I Prepare My Taxes?

To file your federal income tax return, you’ll need to fill out Form 1040 or the 1040-SR for taxpayers who are age 65 or older. Each form will help you determine the amount of income you made over the past year, the deductions you may qualify for, and help you figure out how much tax you need to pay. To complete the form, you will need to have:

• W-2 forms
• 1099 forms
• 1098 forms
• Documents of other income made this year, if applicable
• Documents for taxes already paid (property taxes, estimated tax payments, etc.)
• 2019 tax return
• Bank account number
• Bank routing number

Once you’ve gathered your documents, you’ll need to choose a filing status. You can figure out your filing status by visiting this IRS page. At this point, you will need to decide how you plan on filing your taxes. To streamline the process, you can use a tax preparation software to help file your taxes or consult a tax professional.

Next, you will need to decide whether you want to itemize your returns or take standard deductions. Here is a brief explanation of the two types:

• Standard deduction: The standard deduction lowers your taxable income by a fixed amount set by the IRS. The standard deduction tends to be more convenient, but not everyone can use the standard deduction. If you don’t have any expenses that allow you to make itemized deductions, you should consider using the standard deduction. This is the most common way to use deductions.
• Itemized deductions: Itemized deductions are tax deductions that taxpayers can claim for various expenses. They reduce your taxable income just like the standard deduction, and, depending on how many deductions you can claim, they can potentially help you save more money than standard deductions. Itemized deductions are best to use if the amount exceeds the standard deduction amount.

After you’ve finally decided to use either the standard deduction or itemized deductions, don’t forget to consider whether you are eligible for any tax credits, including the earned income tax credit (EITC). The EITC can help low to mid-income individuals and families lower their tax bills and may, even, result in a tax refund from the IRS. To learn more about the EITC or check if you qualify for it, you can download Publication 5334 from the IRS.

You’re almost done! Once you’ve made your final deduction and tax credit decisions, all you have to do is complete the form, including adding your bank account and routing number if you are entitled to a refund, and file your taxes before the deadline.

Do You Have to Pay Back Your Stimulus Money?

If you are one of the millions of people who received an economic stimulus payment, you should know that you do not have to pay back your stimulus money. Your stimulus money is not considered taxable income. According to the IRS, your stimulus payment is not includible in your gross income, and you do not need to repay any amount of it to the IRS.¹

If you haven’t received your stimulus payment yet, you can check the status of your payment by using the IRS’s free tool. The tool will show you whether your payment was sent to you electronically or via mail, if you qualify to receive a payment.

Earned Unemployment Benefits from CARES Act

Americans that faced unemployment due to the COVID-19 pandemic were given expanded unemployment benefits under the CARES Act. Self-employed persons, independent contractors, freelancers, and gig workers also were included among those who were able to receive unemployment insurance benefits. Under the CARES Act, unemployed individuals could also receive additional benefits under the Pandemic Emergency Unemployed Compensation program. If you received unemployment income, you’ll have to pay federal income taxes on the income and, for some states, state income taxes. Learn more about paying taxes on unemployment benefits in this blog post.

Changes to 2021 Tax Season

There are some changes to the 2021 tax season (which is when you file your 2020 taxes). Most of them were standard adjustments to account for inflation, such as deduction increases for all filers and changes to income tax brackets. The following is a list of the most significant developments for 2020 tax returns.

• Standard deduction: The standard deduction has increased for the 2020 tax year for all filing statuses. Joint married filers can now deduct up to $24,800. Single filers can deduct up to $12,400.⁶
• Income brackets: This year, income brackets have increased by 1% due to inflation. Fortunately, tax rates have not increased this year.
• Charitable contributions: Ordinarily, you can only deduct charitable contributions if you itemize rather than take the standard deduction, but for 2020 tax returns all tax payers, even ones who elect to take the standard deduction, deduct up to $300 for charitable contributions. However, you must have proper documentation.⁷
• Minimum contributions to 401(k): You can contribute more money into your 401(k).⁸

Waived required minimum contributions: Due to the coronavirus pandemic, retirement account holders will not have to make a minimum distribution from their retirement accounts.⁹ Since the distributions generally are taxable, not having to make it will mean some retirees will have lower taxable income for 2020 and owe less federal income taxes.

Filing as a Self-Employed Person 2021

Self-employed individuals are generally required to file an income tax return and to make direct payments to the IRS each quarter. Also, they are required to pay self-employment tax in addition to income tax. The self-employment tax, which is approximately 15.3% of net income, accounts for Social Security and Medicare taxes.¹⁰ Self-employed workers use Form 1040-ES for estimated tax payments toward Social Security and Medicare taxes . You can use the 1040 and 1040-SR to file income taxes.

Learn more on the IRS website.

Note that if you were a self-employed worker in 2020 who took advantage of the expanded unemployment benefits under the CARES Act, you will also need to factor that in when you are doing your taxes. This is because your unemployment income will be added to your taxable income.

Conclusion

In summation, filing for your 2020 taxes isn’t drastically different from other years. There are, however, some changes to the 2021 tax season, such as larger standard deductions and increased income brackets. You’ll also need to consider unemployment benefits and income when you’re doing your taxes, as you’ll be expected to pay taxes on them.

Sources:

1. https://www.taxpolicycenter.org/taxvox/tcja-increasing-share-households-paying-no-federal-income-tax
2. https://www.irs.gov/pub/irs-dft/p509–dft.pdf
3. https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return
4. https://www.irs.gov/payments/online-payment-agreement-application
5. https://www.irs.gov/newsroom/irs-makes-it-easier-to-set-up-payment-agreements-offers-other-relief-to-taxpayers-struggling-with-tax-debts
6. https://www.fool.com/taxes/2019/11/07/heres-the-2020-irs-standard-deduction-and-what-it.aspx
7. https://crsreports.congress.gov/product/pdf/IN/IN11420
8. https://www.aarp.org/retirement/planning-for-retirement/info-2020/401k-contribution-limits.html
9. https://www.irs.gov/newsroom/irs-seniors-retirees-not-required-to-take-distributions-from-retirement-accounts-this-year-under-new-law
10. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes