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IRS Warns Of Delays And Challenging 2021 Tax Season: 10 Tax Tips For Filing Your 2020 Tax Return

  • Taxes
  • February 16, 2021

The Internal Revenue Service says taxpayers should expect limited face-to-face operations, heavy call volume and paper-processing delays as it opens today for tax season 2021, accepting tax returns for tax year 2020. And then there’s all the pandemic-related tax law changes to consider. Here’s a guide to some key issues.

File electronically and use direct deposit. The IRS says that paper-filed tax returns and paper checks will take even longer this year. One out of five taxpayers don’t get their tax refunds by direct deposit. You can provide routing information for up to three accounts—even retirement accounts—on your tax return to which the IRS can send your refund. “I can’t stress enough the importance of filing electronically and choosing direct deposit. This is the safest and easiest way to file an accurate tax return and get a refund,” says IRS Chief Taxpayer Experience Officer Ken Corbin. Taxpayers have until Thursday, April 15, to file their returns and pay any tax owed.

Stimulus payment true up. Most taxpayers got two economic-impact payments in Round 1 and Round 2. If you’re eligible—and either didn’t receive a payment or think you qualify for more than you got—you can claim a Recovery Rebate Credit on your 2020 tax return. For example, if your income was lower in 2020 than 2019, you may be owed a partial credit. Or, if you were claimed as a dependent on someone else’s tax return in 2018 or 2019 but won’t be for 2020, you may be eligible for the credit.

Covid-19 related 401(k) distributions. If you took a CARES Act 401(k) or IRA distribution in 2020 under the loosened rules for tapping your 401(k) penalty free, you can report all of the income on your 2020 tax return or in equal installments over three years. Alternatively, you can recontribute money back into a retirement account and undo the tax consequences of the distribution. For details, see the new IRS Form 8915-E and instructions. Note: The enhanced retirement plan distribution rules were not extended for 2021 in the year-end 2020 tax package. It did clarify that money purchase pension plans were eligible for the special rules. “Folks were disappointed that the Covid-related relief wasn’t extended for 2021,” says Lisa Loesel, an employee benefits lawyer with McDermott Will & Emery in Chicago. “Now we’re back to the standard hardship rules and standard plan loan rules.”

Unemployment benefits are taxable. This includes basic state benefits as well as the extra $600 weekly CARES Act federal pandemic benefits. You should have received a Form 1099-G showing the amount you were paid and any federal income taxes withheld. If you didn’t get a 1099-G, check your state’s unemployment compensation website to access it.

Gig work is taxable. If you picked up a side job during the pandemic, you have to include it on your tax return as self-employment income. The basic rule is this: Individuals must file a tax return if they have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time or temporary. If you have self-employment income, make sure you keep track of deductible expenses relating to your gig, and if you’ve set up a home office, you might qualify for the home office deduction.

Check out the new charitable deduction for 2020. If you made cash gifts to charities in 2020, there’s a new $300 above-the-line charitable donation deduction per tax return. That means that even if you, like most taxpayers, take the standard deduction and don’t itemize deductions, you can take the $300 charitable deduction. Watch out: “These gifts must be substantiated,” says Conrad Teitell, a tax lawyer at Cummings & Lockwood in Stamford, Connecticut. Substantiation rules for cash gifts by itemizers also apply to nonitemizers. You need proof of your gift. For gifts under $250, credit card statements or cancelled checks will work as a receipt. For gifts of $250 or more, you need a written acknowledgment from the charity. (Note for planning charitable gifts for 2021: There’s a new $600 charitable tax deduction for 2021.)

Save for retirement by maxing out your 2020 IRA. You can make tax year 2020 contributions to an Individual Retirement Account through April 15, 2021, and take a tax deduction if you’re eligible. For 2020, the limit on annual contributions to an IRA (pretax or Roth or a combination) is $6,000, plus a $1,000 catch-up contribution allowed if you’re 50 or older. For 2020 and later, there is no age limit on making IRA contributions. If you’re self-employed and have more room for retirement savings, you can still open and fund a SEP-IRA for 2020 through April 15.

Save for healthcare expenses, or retirement, by maxing out your HSA. If you have a hig-deductible health plan, you can contribute to a health savings account and get a triple tax benefit. The money goes in pretax, grows tax free, and comes out tax free if you use it for eligible healthcare expenses. Typically you contribute via salary deferrals but you can top up your annual contribution for the prior tax year through the tax filing deadline. That means you can make 2020 contributions through April 15, 2021. For 2020, the maximum contribution amount is $3,550 for individual coverage, or $7,100 for family coverage, plus a $1,000 catch-up if you’re 55 or older. If you take out money for non-healthcare needs, you’ll owe taxes—plus a 20% penalty if you’re under 65.

Check the IRS Where’s My Refund? tool. Most refunds are sent within 21 days of e-filing. If you’re expecting a refund and want to know when you might get it, the Where’s My Refund? tool on the IRS website lets you plug in your name, filing status and refund amount to check on the status. A personalized refund date should show up 24 hours after you e-file. For taxpayers filing early who are claiming the earned income tax credit or the additional child tax credit, the tool should update by February 22 (they should see refunds by the first week of March). 

Tweak tax payments for 2021. If you got a refund, especially a big one, you can use the IRS tax withholding estimator to determine how much tax to withhold from your paycheck. Then fill out a new form W-4 withholding allowance certificate, and you’ll get more in each paycheck, instead of essentially loaning it to Uncle Sam. On the flip side, if you owe a lot at tax time, you might need to make estimated tax payments for 2021. The due date for first-quarter 2021 estimated taxes is April 15, 2021.

https://www.forbes.com/sites/ashleaebeling/2021/02/12/10-tax-tips-for-filing-your-2020-tax-return-irs-urges-taxpayers-to-e-file-use-direct-deposit-for-quickest-refund/?sh=165049a5463d 

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