Tax Prep for the 2021 Tax Season
2020 is finally over, but now a new challenge lies ahead – filing your 2020 taxes. Thanks to COVID-19, many things have changed for the 2021 tax season. Let’s take a look at the important updates for this tax season. If you need help or have questions, feel free to give us a call or click below to schedule an appointment.
Important Dates for The 2021 Tax Season
Here are the critical dates listed by the IRS that taxpayers should remember for the 2021 tax season:
Taxpayers can begin electronically filing returns; tax returns will be transmitted to the IRS starting February 12.
The IRS starts processing and accepting returns for the 2021 tax season.
The projected day that the IRS.gov Where’s My Refund tool will be updated for those claiming EITC and ACTC.
First Week of March
Tax refunds will begin coming in for those claiming EITC and ACTC for those who e-file with direct deposit, and there are no problems with their tax returns.
The deadline for filing 2020 tax returns.
2020 non-profit tax returns are due.
Partnership and S Corp returns that filed an extension are due.
The deadline to file for those that need an extension on their 2020 tax returns
Tax Deductions and Credits for the 2021 Tax Season
Deductions and credits help you keep more of your money. Tax deductions help reduce how much of your income is taxed for federal income taxes. Tax credits reduce your actual tax bill.
Here are some deductions and credits you may be able to claim on your 2020 tax return:
If you are self-employed, there are many deductions you can claim on your taxes, such as travel costs and the home office deduction if you use an office in your house for business.
The CARES Act permits taxpayers to subtract up to 100% of their adjusted gross income (AGI) in charitable donations if they plan to itemize their deductions. The CARES Act also added a new standard deduction that makes it possible to write off up to $300 of charitable contributions made in cash.
Families may be able to claim up to $2,000 per child with this credit. And because this is a refundable credit, you could receive up to $1,400 per child as a refund.
The EITC is a refundable credit implemented to help low- and middle-income workers. Depending on your earnings for the year, how many dependents you have, and your filing status, this credit could save you between a few hundred to a few thousand dollars on your taxes.
You can deduct medical expenses above 7.5% of your AGI (adjusted gross income), which is your total income minus any other deductions you have already taken.
How Will COVID-19 Affect My Taxes This Year?
Let’s dive into the basics for the 2021 tax season updates concerning COVID-19.
- Unemployment Benefits
Many taxpayers found themselves out of work due to the pandemic and received unemployment benefits for support. Those who collected unemployment benefits will need to pay income taxes on those funds.
If you chose not to have taxes taken from your unemployment when you signed up, you will either have to pay quarterly taxes or set aside enough money from your unemployment benefits to pay your taxes.
- Stimulus Checks
During the 2020 pandemic, the government sent a first round of $1,200 stimulus checks to millions of Americans (plus $500 per minor child). The second round of stimulus sent was $600 per taxpayer, with an additional $600 for each minor child.
Your stimulus check will not be taxed. Instead, it’s being counted as a refundable tax credit for 2020.
- Paycheck Protection Program (PPP) Loans
The CARES Act also offered small business owners Paycheck Protection Program (PPP) loans. These loans are “forgivable” if they were spent on certain business expenses. Initially, the IRS said that any expenses you paid with money from those PPP loans cannot be deducted from your taxable income. However, PPP Is now forgivable and does not impact income or expenses. This change was signed into law by the Trump Administration on December 27th, 2020.
- Educational Expenses: 529 Plans and ESAs
Any money taken out of an Educational Savings Account (ESA) or a 529 Plan must be used for educational expenses to be considered tax-free. Many universities went virtual or canceled classes this year—which means your university might have refunded your ESA or 529 money. If so, you had 60 days to put the money back in the account OR use it to cover other educational costs. If you didn’t do this, you might have to pay the taxes and a withdrawal penalty.
- Retirement Plans
There were several changes to retirement plans in 2020—and those changes could affect your taxes this year.
- The CARES Act permits people under age 59 1/2 to withdraw up to $100,000 out of their IRAs and 401(k)s in 2020 without penalty. The money you take out of these accounts will be taxed as ordinary income.
- If you have a traditional IRA, you must withdrawal some money once you reach a certain age. This is called required minimum distributions (RMDs). The SECURE Act increased the age for these RMDs from 70 1/2 to 72. The CARES Act also permits taxpayers to skip RMDs altogether in 2020 without any penalty fees. This could lead to considerable tax savings for retirees since the money taken out of a traditional IRA is taxable.
- The SECURE Act allows traditional IRA owners to keep adding money to their accounts past age 70 1/2 starting in 2020. This is a way to decrease how much of your income is taxed this year because the funds you put into a traditional IRA are tax-deductible. You will still be required to pay taxes on that money when you take it out.
If you did take funds out of a 401K or traditional IRA, you have three years to put that money back and get refunded for taxes paid on those funds. Reach out to a professional who can walk you through the process. If you need help, give us a call at 770-456-9980.
Get Your Taxes Done Right in 2021
Working with a tax professional is a smart choice, especially with all of these new chances to save money on your 2020 tax return. If you’re looking for a trustworthy tax pro near you, look no further. Our tax experts have many years of experience and can help you file your tax refund with confidence. Call us at 770-456-9980, or fill out the form to schedule an appointment today!
Frequently Asked Questions About 2021 Tax Prep
Will I need to pay taxes on the stimulus check money I received?
No, the stimulus money will not count as taxable income. It’s being counted as a refundable tax credit for 2020. (Your stimulus check is almost like an advance on funds you would have received as part of your tax refund in 2021.)
Are unemployment benefits from 2020 taxable?
Yes, the unemployment benefits you collected in 2020 will count as taxable income on your tax return. If you chose not to have taxes withheld from your unemployment payments, then you’ll have to pay quarterly taxes on it.
I took on some side gigs to make up for lost income. What should I expect?
Did you deliver groceries with Instacart or drive for Uber? The money you made doing odd jobs or freelancing will be taxed, so here’s a summary of what you need to know:
- First, you’ll owe income taxes on that money at your regular tax rate.
- If you made more than $400 in self-employment income, you will also have to pay a 15.3% tax, covering your share of Social Security and Medicare taxes. However, you may be able to write off half of that 15.3% on your tax return.
- You will probably receive 1099 independent contractor forms from those you did work for, and you must fill out a Schedule SE form to report any other self-employment income you earned during 2020.
Since I was working from home, can I claim the home office deduction on my taxes?
The home office tax deduction is only allowed for freelancers, independent contractors, or self-employed people who have a home office used solely for regular business. Unfortunately, that means workers sent home by their employers throughout COVID-19 don’t get this deduction since they don’t only work from home.
My company deferred my payroll taxes for the remainder of 2020. Will this affect my tax return?
The Trump administration permitted companies to suspend payroll taxes from September 1, 2020, through December 31, 2020. So, if you work for the government or at a company that chose to defer payroll taxes, you saw a temporary increase in your paychecks. Unfortunately, this is not a tax break—those taxes will still need to be paid. That means your employer will have to take those extra taxes out of your paycheck between January and April 2021, so you’ll have a decreased paycheck during that time.
Got More Questions? Work With Our Tax Pros!
This 2021 tax season could get messy for many Americans who have seen their lives changed by this pandemic. If you’re one of them, it is a good idea to contact a tax advisor who is updated on the news and developments for this tax season in 2021.
If you want to ensure your taxes are done correctly and avoid making substantial tax errors that could cost you thousands of dollars, our Georgia tax professionals are ready to help! Give us a call today at 770-459-9980.