Tax time: what’s new for tax season 2021
While 2020 is a year that everyone would love to forget, there’s one remnant that’s looming over our heads: taxes. Tax season is here again. Thanks to the pandemic, there are various changes to be aware of before you file—especially if this is your first time filing. The deadline to file is back to the usual date of April 15th, which will be here before you know it. File your taxes with confidence—below are seven things to keep in mind when you file your 2020 tax return.
Economic Impact Payments
2018 and 2019 taxpayers were issued Economic Impact Payments, colloquially known as stimulus checks, as part of the CARES Act to relieve COVID-19’s economic effects. However, many people were left out, receiving only partial payment or no payment altogether. If you did not receive the full amount you qualified for, you can claim the Recovery Rebate Credit when you file your 2020 tax return. The Recovery Rebate Credit is for individuals who did not receive Economic Impact Payments or did not receive the full payment. If you file electronically, the tax software you use will help you determine your Recovery Rebate Credit. The Form 1040 and Form 1040-SR instructions can also help determine your eligibility.
Many Americans lost their jobs or were temporarily unemployed after the pandemic shut down most of the country, forcing people to apply for unemployment benefits. For those who received unemployment, they could choose whether or not to have their taxes withheld. Recipients could either have a flat 10% rate withheld from their benefits or forego the option altogether. For those who chose the latter, you either paid quarterly estimated taxes or will pay your taxes when you file your return.
Interest on refunds
In 2020, some taxpayers received up to $18 in interest payments on their federal refund. Refund interest payments are taxable and must be reported when you file your 2020 federal income tax return. The IRS sent Form 1099-INT to anyone who received $10 or more in interest. If you did not receive the form, you must still report your interest income earned. To get your interest-earning amounts, you can check your account statement or contact your financial institution.
Charitable deduction changes
Taxpayers can take standard or itemized deductions. Most taxpayers take the standard deduction, which increased slightly this year—$12,400 if filing single, $18,650 if filing head of household, and $24,800 if filing jointly. This year, taxpayers who do not itemize deductions can take a charitable deduction of up to $300 for cash contributions made to qualifying organizations. This means the deduction lowers your adjusted gross income (AGI), which is your total income minus any deductions already taken, and taxable income—translating into tax savings for you. Cash contributions are donations made by check, credit card, or debit card. Keep in mind that every situation is different as to whether you should take the standard deduction or itemize. For more information on claiming charitable deductions, you can read Publication 526, Charitable Contributions.
Unfortunately, because of the pandemic, many families struggled with medical bills. There is hope—you can deduct any medical expenses above 7.5% of your AGI. For example, your AGI is $50,000, and you incurred $8,000 in medical expenses. You would take $50,000 and multiply that by .075 (7.5%) to get $3,750. In this case, everything above $3,750 would be deductible—meaning you could deduct $4,250. The lower your AGI, the more deductions you’ll receive. Most medical expenses can be deducted unless you funded them with a flexible spending account (FSA) or health savings account (HSA). However, if you wish to deduct any medical expenses, you’ll need to itemize, which takes longer.
If you were self-employed in 2020, there are various deductions you can claim on your tax return, like travel expenses or the home office deduction. The home office deduction covers things like mortgage interest, insurance, utilities, repairs, and depreciation. However, if you, like millions of Americans, worked remotely, you cannot claim these deductions. The Tax Cuts and Jobs Act suspended the business use of home deductions through 2025. Home office deductions are reserved for independent contractors or other self-employed individuals who regularly and exclusively use their home to conduct business and their work. So, employees who receive a paycheck or W-2 from an employer are not eligible to claim the deduction—even if they currently work from home.
Earned Income Tax Credit
While this isn’t new, the Earned Income Tax Credit (EITC) often goes unclaimed. Around 20% of eligible taxpayers don’t claim the benefit or file a return because they don’t realize they’re eligible. The EITC helps low- to middle-income workers and their families receive a tax break. If you qualify, that money earned can reduce the amount you owe or go towards your tax refund. You can determine if you meet requirements by using the IRS’s EITC Assistant.
Remember—if your income is less than $72,000 annually, you’re qualified to file your return for free using the IRS’s Free File Program. Once your return has been accepted by the IRS, you can use the Where’s My Refund tool to track when you’ll receive your refund. April will be here before you know it, so it’s best to allow yourself plenty of time to file to ensure there are no errors. Keep these tips in mind, and tax season will be a breeze.