As we put 2020 behind us on the calendar, it is still very relevant from a tax perspective. COVID-related legislation and other government changes are sure to make the upcoming tax filing season interesting, to say the least. To help, the IRS has some tips to help U.S. taxpayers take necessary actions now to help file federal tax returns timely and accurately in 2021, including special steps related to Economic Impact Payments (EIP). In today’s blog, we’ll outline the steps.
- Steps taxpayers can take now to make tax filing easier in 2021
A good first step, and often the easiest, is to gather Forms W-2, Forms 1099, and other income-related documents to help determine if you're eligible for various deductions or credits. If you received an Economic Impact Payment, you'll also need your Notice 1444, Your Economic Impact Payment, to calculate any Recovery Rebate Credit you may be eligible for on your 2020 federal income tax return. Please note that most income is taxable, including unemployment compensation, income from the gig economy and income from the sale of virtual currencies, such as Bitcoin.
If you have an Individual Taxpayer Identification Number (ITIN), you should ensure it hasn't expired before filing your 2020 federal tax return. If it has, you should submit a Form W-7, Application for IRS Individual Taxpayer Identification Number, now to renew. Failing to renew an ITIN before filing a tax return next year could delay your refund and may make you ineligible for certain tax credits.
The Tax Warriors® constantly remind our readers to revisit their withholding from time to time, if you are a W-2 employee. You can use the Tax Withholding Estimator on IRS.gov to help determine the right amount of tax to have withheld from your paychecks. If you need to adjust withholding, you should submit a new Form W-4, Employee's Withholding Certificate, to your employer as soon as possible. Obviously, time is running out to make changes to your 2020 withholding.
Those who receive non-wage income such as self-employment income, investment income, Social Security benefits, and pension and annuity income, may need to make estimated tax payments. We’ve written a blog on the ins and outs of this process, and on how to determine if you need to do it. You can read it here.
- New in 2021: Those who didn't receive an Economic Impact Payment may be able to claim the Recovery Rebate Credit on their 2020 return
You may be able to claim the Recovery Rebate Credit if you met the eligibility criteria in 2020 and:
- You didn't receive an Economic Impact Payment this year, or
- Your Economic Impact Payment was less than $1,200 ($2,400 if married filing jointly for 2019 or 2018) plus $500 for each qualifying child.
For additional information about the Economic Impact Payment, you can visit the IRS’s Economic Impact Payment Information Center.
- Did you receive interest on a federal tax refund? Remember such payments are taxable
Many individual taxpayers whose 2019 tax returns showed refunds received interest from the IRS in 2020. These interest payments are taxable and must be reported on 2020 federal income tax returns. In January 2021, the IRS will send a Form 1099-INT, Interest Income, to anyone who received interest totaling at least $10.
Although the IRS issues most refunds in less than 21 days, the IRS cautions taxpayers not to rely on receiving a 2020 federal tax refund within this time period. Some returns may require additional review and may take longer.
- EITC/ACTC-related refunds should be available by first week of March
By law, the IRS cannot issue refunds for people claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund − even the portion not associated with EITC or ACTC. The IRS expects most EITC/ACTC-related refunds to be available for direct deposit or on debit cards by the first week of March, assuming there are no other issues with the tax return.
- With social distancing continuing, taxpayers can stay home and stay safe with IRS online tools
You can find online tools and resources to help get the information you need, especially those with straight-forward tax returns. These online tools are easy to use and always available. Most can use them to find information about their accounts, get answers to tax questions or file and pay their taxes. A special page, updated and available on IRS.gov, contains more information on preparing for the 2021 filing season.
For those with more complex and/or multiple tax returns, contacting your tax advisor now can help jump start the process for the 2021 filing season. At Drucker & Scaccetti, our advisors are well versed in all aspects of the changes that occurred in 2020 and how to best apply them to your specific situation. Call on us to help your family and/or business with its strategic plan for addressing the upcoming tax season and beyond.