If taxes are a certainty in life, so are the people who wait until the last minute to file.
Well, that last minute is getting real close — and this is one where you certainly don’t want to rush if you can help it.
That’s because the federal tax season that ends May 17 follows a year where lawmakers packed in all sorts of tax-code quirks and caveats for people living through the pandemic, and its economic side effects.
A hasty, eleventh-hour return could result in error or money left off the table. No one wants that, and this year especially, people may need every single tax dollar they can get.
A hasty, eleventh-hour return could result in error or money left off the table.
There are a unique range of 2020 tax rules in addition to the usual pitfalls, said Greg Hammer, CEO and president of Hammer Financial Group in Schererville, Ind. “There’s so much that’s new to the tax return,” he said.
As of April 23, the Internal Revenue Service has received almost 5% fewer returns than it did at the same point last year.
May 17 is the deadline to file your federal income taxes and pay the Internal Revenue Service anything that’s owed. Many states, but not all of them, are also going with a May 17 income-tax payment and filing deadline.
People can get an extension to file their taxes by Oct. 15, but May 17 is the last day to pay anything owed before penalties and interest start. (Residents and businesses in Texas, Oklahoma and Louisiana get a June 15 deadline in the aftermath of February’s damaging winter storm.)
So for any procrastinators, here is a checklist:
The last chance to claim missed-out 2020 stimulus check
Maybe you received your $1,200 and $600 stimulus checks from last year. In which case, great. Between the two rounds, the IRS already disbursed approximately 307 million direct payments for $412 billion.
But if you haven’t received any payment yet, or you got an incomplete amount, stop here. The way to get that cash is by claiming a “Recovery Rebate Credit” on the 2020 tax return.
One reason someone may have missed the money is because they made too much when the IRS initially reviewed either 2019 returns to determine eligibility (or 2018 returns if the 2019 returns weren’t yet available).
The IRS says it will not seize Recovery Rebate Credit money for federal income tax debts.
The income caps for full payment are $75,000 a year for individuals, $150,000 a year for married couples filing jointly and $112,500 a year for people filing as heads of household.
When the IRS issued payments, it might not yet have known about a new child, adopted child or foster child in the house last year. That’s another reason to seek money in the credit, experts note.
The money gets lumped into a refund, but taxpayers behind on government debts need to beware the IRS may still skim money off the top to pay those obligations.
The IRS said it would not seize the Recovery Rebate Credit money from the refund for federal income tax debts, according to National Taxpayer Advocate Erin Collins. But that doesn’t apply to past due state debts, like back state taxes or child support.
Usually, the IRS said, refunds go to taxes you owe and remaining federal income tax liabilities. But, the agency added, “If you are eligible for a 2020 Recovery Rebate Credit, and your return reflects a tax refund — the refund amount associated with the 2020 Recovery Rebate Credit will not be applied to a federal income tax liability.”
The credit can “can be reduced to pay debts owed to other federal government agencies (separate from federal income tax debt) as well as to state agencies. Keep in mind that the credit is part of your tax refund and your tax refund is subject to any offset,” the IRS added.
Masks can be a write off (but maybe not the spare monitor)
After a year when items like hand sanitizer flew off the shelf, the IRS has made it clear that those kinds of purchase and other personal protective equipment could get you a write-off.
Teachers can include expenses like masks, face shields, hand sanitizer, cleaning supplies and more in the deduction for unreimbursed educator expenses, the IRS said.
The deduction is up to $250 and teachers can take the deduction while also taking the standard deduction.
Teachers can include expenses like masks, face shields, hand sanitizer, cleaning supplies and more in the deduction for unreimbursed educator expenses.
These same cleaning and health supplies, meant to slow COVID-19’s spread, also count as tax-deductible medical expenses.
Here’s the catch: If taxpayers are taking this route, they’ll have to itemize their deductions instead of taking the standard deduction. The $10,000 state and local tax deduction, and mortgage interest are two other itemized deductions.
The vast majority of tax returns — about 87% in 2018 tax year — opted for the standard deduction because it provides a bigger break than itemizing. This year the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly.
If someone’s itemizing their medical costs, it would be wise to amass their receipts. Taxpayers can deduct medical expenses that are above 7.5% of the person’s adjusted gross income, the IRS says. Other deductible expenses include the payment for doctor’s visits and in-patient treatment.
Remember, there is a preexsiting deduction on home office expenses. That might sound enticing to every person who had to buy extra supplies as they converted their bedroom into their work cubicle last year.
However, the deduction currently only applies to self-employed taxpayers and independent contractors, the IRS said. Learn more here.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a valuable credit for low- and moderate-income working families. The payouts depend on factors including a household’s income and the number of children, but the payouts can go from $538 to $6,600.
As the credit itself states, the money is tied to “earned income” from work — but the problem was many people had less earned income to show for 2020.
Under a provision in the $900 billion rescue packages from late December, the IRS is giving people a choice on the numbers they want to supply for their earned income.
This gives people the chance to maximize their payout. “If your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure your EITC for 2020,” the IRS said.
If you are working with a tax preparer, the easiest way to compare the two amounts is by making sure the preparer sees last year’s return, one expert noted.
And if you already filed your taxes? You’re not alone. At least 5 million people filed their taxes before the $1.9 trillion American Rescue Plan authorized a federal income tax exclusion on the first $10,200 a person received in jobless benefits.
The IRS is automatically readjusting these returns and sending the filers extra money as a result. But some people who did not claim the EITC may want to consider amending their returns to claim the credit — and get even more money as a result. Read more here.
Be on the lookout for this question about cryptocurrency
One of the tax time curveballs is a question prominently near the top of the Form 1040. The IRS — which is increasingly focused on cryptocurrency — wants a ‘yes’ or ‘no’ for this question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Cryptocurrencies like bitcoin
are property in the IRS’ view, and when value goes up and a person sells, they’ll have a capital gains tax to pay. The same rules apply on stock sales.
Tax experts have told MarketWatch a person could say ‘yes,’ but still not pay any taxes. They could have the cryptocurrency but not sell it, and thereby avoiding a taxable event. Two accountants had differing opinions on whether to say ‘yes’ if merely holding cryptocurrency and doing nothing else.
It’s critical to record sales, purchases and trades but amassing that tax information isn’t always easy. Laura Walter, owner of Crypto Tax Girl near Salt Lake City, Utah, previously shares this bit of advice for the newcomer piecing together transaction information. “Just file [for] an extension. You can’t just do this overnight,” she told MarketWatch.
There is still time to shrink your tax bill
Another way to make the most out of the tax return is by reducing the tax liability with contributions to tax-advantaged accounts like Individual Retirement Accounts or Health Savings Accounts.
The deadline to contribute to both types of accounts for tax year 2020 is May 17. There’s a $6,000 IRA annual limit on IRA contributions for people up to age 50 and $7,000 for people above that age. There’s a $3,550 contribution limit for individuals under using an HSA and $7,100 for plans providing family coverage.
Contributions to each account supplies a dollar-for-dollar deduction on a person’s tax bill. IRA deductions can phase out based on variables like income and access to a retirement plan at work. The value of HSA deductions do not phase out based on income, experts note — and this year, there’s no reason why someone couldn’t use their stimulus check cash for the contribution.
IRA contributions are an increasingly common move right now, according to Fidelity Investments.
There was a 48% year-over-year increase in the money poured into IRAs between the start and finish of 2021’s first quarter compared to 2020’s first quarter, the company said. A $6,000 contribution could grow into a $64,059 sum after 35 years, according to Fidelity projections.