Tax season is about to begin across the country. If you’re like us, you probably never want to think about 2020 again, however you do need to file your 2020 taxes.
Thanks to the coronavirus, a lot has changed for the 2021 tax season. That’s why you need to start thinking about your tax situation
Loeffler Financial Group recommends scheduling an appointment with a tax professional to ensure taxes are accurate, especially with some people having major income changes due to unemployment, and pandemic relief programs and tax credits, including additional allowances for charitable donations and the Recovery Rebate Credit.
First, here are the main things you need to know right off the bat for the 2021 tax season:
- Tax Day is Thursday, April 15, 2021. You must file your 2020 tax returns by this date!
- 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.
Tax Deductions and Credits to Consider for Tax Season 2021
When it comes to filing taxes there are 2 things to pay attention to: deductions and credits. Both help you keep more money in your pocket in different ways!
Tax deductions help lower how much of your income is subject to federal income taxes while tax credits lower your actual tax bill dollar for dollar.
Here are some deductions and credits you might be able to claim on your 2020 tax return:
NEW this tax filing year, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations.
If you spent a lot of time in the hospital or have large medical bills, you might be able to find at least some tax relief.
You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken.
If you’re self-employed, there are a bunch of deductions you can claim on your tax return—including travel expenses and the home office deduction if you use a part of your home to conduct business.
TAKE NOTE: If you’re one of the millions of workers who were sent home to work remotely through the pandemic, you won’t be able to claim the home office deduction since it’s reserved for self-employed individuals only.
Earned Income Tax Credit
The EITC is a refundable credit designed to help out lower-income workers. Depending on your income, your filing status and how many children you have, the credit could save you anywhere from a few hundred to a few thousand dollars on your taxes.
Child Tax Credit
Families can claim up to $2,000 per qualified child with this tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples).
You should work with a tax advisor who can make sure you’re not leaving any deductions or credits on the table. Depending on your situation there are other tax deductions and tax credits to take!
The Coronavirus and Your Taxes
Here are some things to keep in mind when you file your 2020 taxes:
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s $2 trillion relief package, the government sent out a stimulus check to millions of Americans.
This stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. In layman’s terms, the stimulus check is like an advance on money you would have received as part of your tax refund in 2021.
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—payroll, rent or interest on mortgage payments, and utilities, to name a few—these loans were designed to be “forgiven.”
Many Americans found themselves out of work after the pandemic shut down turning to unemployment for assistance. Those who received unemployment benefits will need to pay income taxes on that money.
Retirement Plans: 401(k)s, IRAs and More
There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. Let’s tackle each of those major changes:
- The CARES Act allows folks under age 59 and 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty.
- Taking money out of your retirement accounts before retirement is a terrible idea—penalty or not.
- The money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income.
- If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs).
- The SECURE Act pushed back the age for RMDs from traditional IRAs from 70 and 1/2 to 72 (if your 70th birthday was July 1, 2019 or later).
- The CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. This could lead to significant tax savings for retirees with those accounts since the money that’s taken out of a traditional IRA counts as taxable income.
- The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 and 1/2 starting in 2020. Since the money you put into a traditional IRA is tax deductible, you could lower how much of your income is taxed this year.
One last thing—It’s probably a good idea to reach out to a tax advisor who can assist you and review all the new tax laws and changes for the upcoming tax season.
With the coronavirus still spiking, Loeffler Financial Group will continue their virtual tax appointments and consultations, along with their easy and stream-lined drop off tax services. Book your virtual appointment today, or call us to learn more about our drop off program.