Jan 25, 2021
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Get ready for one unruly tax season where many filers will face longer tax refund delays, the rules of the game for key credits have changed and many remain angry about stimulus checks and tax refunds from last year that never showed up.
Don't you love taxes?
While plenty of tax professionals are open for business now to prepare your 2021 tax return, the Internal Revenue Service will not kick off the season until Feb. 12 when the IRS will begin processing returns. That's slightly more than two weeks later than last year. And it's more than three weeks later than several years ago.
The IRS said it needs the extra time to program its systems to reflect new tax rules that were signed into law Dec. 27, plus the IRS has been busy sending out the second round of Economic Impact Payments in January.
The IRS said other problems and delays could take place with issuing refunds, if the filing season were opened without taking the time to first fix its programming.
"Given the pandemic, this is one of the nation’s most important filing seasons ever," IRS Commissioner Chuck Rettig said in a statement.
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Traditional early filers can still get cracking on their returns, but they will have to plan to receive their tax refund money a few weeks later than expected. It's not a small group.
Take a look at last year's stats. The IRS already had received 39.6 million individual income tax returns by Feb. 14, 2020, and the bulk of those returns — 38.3 million — had been processed. About 18 million refunds were issued in that timeframe.
The IRS is urging taxpayers to file electronically — and if they're getting a refund to use direct deposit — to speed up a refund. And they're encouraged to complete a return as soon as they have the information they need. Most people file electronically already.
Many people are looking at big tax refund money. Last year's average tax refund, according to the IRS, was $2,535.
This year, some could boost their federal income tax refund, especially if they didn't receive all their stimulus cash already.
The IRS noted that people can begin filing their tax returns with tax software companies, including IRS Free File partners. Your tax return would be transmitted to the IRS starting Feb. 12.
The pandemic and the economic fallout create special tax headaches, too. You'll want to contact your tax preparer to see how any drop-off services are working and what social distancing measures are in place. H&R Block notes, for example, that those who are high risk and need to take additional COVID-19 precautions can request an after-hours appointment.
Many things, including the mail, aren't going smoothly. Frankly, the odds appear to be going up that you might experience some potential mail delays for some 1099 forms that report interest income or other income.
Bank of America, for example, warned its customers in January that U.S. Postal Service delays could mean that "your Bank of America mail, including statements and year-end tax information, may also be delayed." Bank of America suggested to customers that they may want to download and print their tax information or sign up for paperless statements. Many forms, including W-2 forms, must be sent by Jan. 31.
Cari Weston, director for tax practice and ethics at the American Institute of CPAs, said she'd recommend that taxpayers go to IRS.gov to set up an online account to access their tax records, including wage and income transcripts. That way you'd see what 1099s financial institutions and other third parties submitted for you and you wouldn't overlook reporting taxable income in case of delays in the mail.
The Internal Revenue Service will begin processing tax returns on Feb. 12, which is slightly more than two weeks later than last year. But tax professionals are already preparing taxes now. An H&R Block office located in Madison Heights advertised that it was open on Friday Jan. 15.
"Anything the IRS gets will be there," Weston said.
To do this, you'd go to IRS.gov and click on the box that says "Get Your Tax Record."
Weston has another tip: "I would not mail a return — and I would not mail a payment."
The IRS continues to deal with processing backlogs associated with 2019 returns and general correspondence sent in 2020.
About 16 million individual income taxpayers filed paper tax returns. But some taxpayers waited six months or longer for the IRS to process those returns because the IRS could not fully staff its mail facilities, according to the report National Taxpayer Advocate Erin M. Collins made to Congress in January.
Many people are still waiting for refund money.
"On Dec. 31, the IRS website indicated there were still 7.1 million unprocessed individual returns and 2.3 million unprocessed business returns as of Nov. 24," according to an IRS news release dated Jan. 13 that details the report by the National Taxpayer Advocate.
The IRS had received about 169 million individual income tax returns as of Nov. 20. That included about 8.4 million that were filed solely to claim stimulus payments, according to the advocate's report.
By contrast, 155.4 million individual tax returns were filed in 2019, according to IRS statistics online for the week ending Nov. 20.
More:Tax refunds won't come as quickly this year. Here's why.
This year, the impact that the coronavirus had on our economic lives in 2020 will be reflected on our tax returns. Here's a look on some strategies to consider:
Did you collect unemployment compensation in 2020?
The coronavirus-induced recession triggered massive unemployment across the U.S.
Making matters worse at tax time, those jobless benefits must now be included in taxable income on federal returns and on many state returns.
We could be talking about adding on a good deal of income. The CARES Act boosted jobless benefits by an extra $600 a week beginning in April through July, on top of a state's regular benefits. As a result, some people nationwide may have received $1,000 or so a week in jobless benefits for four months.
More:Lost a job? How to pay taxes on unemployment benefits
The tax season shocker for many jobless people will be that their tax refund could be far smaller than expected or they might even owe taxes.
Look out for Form 1099-G, Certain Government Payments, to show how much unemployment compensation was paid to you in 2020. See Box 1 for the taxable income you must report on Line 7 on Schedule 1 of the 1040.
See Box 4 for any taxes that you might have withheld from your jobless benefits during the year. You'd report those withholdings on Line 25b of the 1040.
Taxes are not withheld automatically from jobless benefits. If you are jobless in 2021, and receiving unemployment compensation, you may want to take action to have federal taxes withheld in the future.
Did you get your stimulus money?
Taxpayers will need to file a 2020 federal income tax return to claim the Recovery Rebate Credit if they didn't get their Economic Impact Payments or they received less money than they're eligible to get, such as if a child's stimulus wasn't included in the payout.
The Recovery Rebate Credit is listed on Line 30 of the 1040 Form for the 2020 tax year.
The IRS noted that it issued two Economic Impact Payments as part of the economic stimulus efforts, effective last year. The second payment officially began rolling out Dec. 30 but only was available to many people beginning in January and the payments will continue into February for some.
The first payment, which was launched beginning last April, was up to $1,200 for single people — $2,400 for married couples — and $500 per qualifying child. The second payments were up to $600 for single people — up to $1,200 for couples filing a joint return — and $600 per qualifying child.
If you don't believe you received the correct amount for a stimulus payment — or if you didn't receive anything yet, the 2020 tax return offers a second chance at some money for those who qualify.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said taxpayers will be able to calculate the credit owed based on their 2020 income and family situation.
More:What to do if you must file a tax return for missing stimulus check
If you already received more stimulus money than you would have qualified for based on your 2020 situation, then you don't have to repay the difference, Luscombe said.
Stimulus payments are not reported as part of your taxable income, so you do not pay federal income taxes on either the first or second round of stimulus payments.
When it comes to getting paperwork ready, you'll want to dig up the IRS Notice 1444 for the stimulus payment amount you were issued in 2020. And the second round of payments would be outlined in Notice 1444-B.
Did you make a few extra charitable donations?
Food banks and others found themselves in need of contributions as the country dealt with skyrocketing unemployment. Many of us heard the call and wrote out checks that can now be used as a tax deduction.
See Line 10-b on the 1040 return for 2020 to take an above-the-line deduction for charitable contributions. Cash donations of up to $300 made to qualifying organizations before Dec. 31, 2020, are now deductible when you file your tax return, thanks to a special provision enacted earlier last year.
On the 2020 tax return, many taxpayers would be able to deduct $300 for a charitable contribution made last year even if you take the standard deduction. (Taxpayers who are married but filing separately may only deduct up to $150 each.)
The standard deduction is $12,400 for single filers and $24,800 for married couples filing a joint return for 2020.
H&R Block Chief Tax Officer Kathy Pickering stressed that charitable donation must be in cash to qualify for the above-the-line tax break.
Donations of clothing, used furniture and other non-cash items do not qualify for this special tax break. Pickering noted that the donation must also be made to a qualified charitable organization — more information on organizations qualified under section 170(c) of the Internal Revenue Code can be found on the IRS website at IRS.gov.
Nearly nine in 10 taxpayers now take the standard deduction, according to the IRS. As a result, many tax filers could benefit from the new rule.
Pickering gave this example: A taxpayer in the 22% tax rate bracket with a $300 deduction would save $66 by taking the above-the-line deduction.
She said someone in the 12% tax bracket — which applies to single filers making up to roughly $40,000 and married couples making up to about $80,000 — the tax savings amounts to $36.
Only about 11.4% of individual tax filers itemized deductions. If you itemize, you cannot take the above-the-line deduction for charitable contributions.
By law, the IRS notes, "special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt or acknowledgement letter from the charity, before filing a return, and retaining a cancelled check or credit card receipt."
A single cash donation of $250 or more requires a written acknowledgment from the charity, even if you have a receipt.
The new charitable deduction would lower both your adjusted gross income and taxable income.
The IRS noted: "Cash donations include those made by check, credit card or debit card. They don't include securities, household items or other property. Though cash contributions to most charitable organizations qualify, some do not."
Keep your paperwork as you support charities with cash donations in 2021. Married couples who file a joint return and do not itemize could take a deduction for up to $600 in cash contributions in 2021.
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Worried that you won't qualify for the earned income credit?
Some lower-wage workers — particularly those who expected to make $25,000 or less in 2020 — could have been at risk of losing out on the Earned Income Tax Credit if they lost jobs last year.
But a new lookback provision, which was part of the stimulus package passed in Congress in December, will enable tax filers to use either their 2019 or 2020 earned income to calculate the Earned Income Tax Credit on their 2020 income tax returns.
It will be important to review your 2019 tax return or bring it to a tax preparer, along with your tax documents for 2020. That way you can run the numbers to see what works to your advantage.
The provision will help taxpayers who lost jobs or hours during the pandemic in 2020.
You'd choose the year's income that would generate a bigger tax break.
Many office workers and others who now are working from home during the pandemic are wondering if they'd get an extra tax break.
Were you lucky enough to be able to work from home?
Lots of people will be disappointed because they won't get a tax break after packing up and taking their office job home during the pandemic.
If you're an employee of a school district or an automaker, for example, the tax rules don't allow you to claim a home office deduction for unreimbursed business expenses relating to working from home. That's the case if you're working for someone else.
After some significant changes in the tax rules and the economic fallout last year, tax season won't be simple. But really, when is it ever?
ContactSusan Tompor via email@example.com. Follow her on Twitter@tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.