Your Pre-Tax Season Tune-Up
What you need to know and do for an easy return (and quick refund)
We’re usually talking to you about how you can blow your tax return, but today we’re reminding you to be responsible. Take some time during the weekend for a quick financial tune-up of sorts. Because even though the IRS just extended the filing deadline by a month, now's the time to do it. But filing your return can be, at best, annoyingly dull and, at worst, frighteningly daunting. No one wants to pay more than they need to but you certainly don't want to screw up, especially if you're not familiar with the current rules and regulations.
Failing to understand the tax code can mean you'll miss out on beneficial breaks and deductions or getting slapped with late-payment charges. And you've likely got some questions. Like is unemployment money taxable? What about the stimulus checks? Should we all be taking a home office credit? Here's everything you need to know in order to prepare for an easy tax filing.
According to Bill Smith, managing director of financial consulting firm CBIZ, you don't want to be late when it comes to filing your return. If you're hesitant because you don't think you'll be able to pay, know that you can always request a deferment or payment plan. The penalty you'll be hit with for failing to file is far more than the penalty for failing to pay. Smith says that while there is no failure-to-file penalty on returns that are due a refund, you shouldn't procrastinate. After three years, all refunds are forfeited.
Note: If you need more time, you can request a filing extension to October 15, 2021.
Honestly, getting all of your required documents to file your return is the most tedious and complicated part of the process. Once you have all the necessary papers in front of you, it's just a matter of filling in the blanks. And while the new standard deduction increase may knock a lot of people out of itemizing deductions, you still want to have everything on hand before you start filing your return. NerdWallet has prepared the ultimate Tax Prep Checklist on what you need; from last year's taxes and income documents to any big expenses or donations you're planning to claim.
to Go Pro
If you don't already have a tax attorney, you likely don't need to have a paid preparer handle your return. In 2020, 4.2 million Americans used the Free File program for their 2019 taxes, according to the IRS. And even more used free tax preparation software from TurboTax and H&R Block. This is an excellent strategy, since the software will fully incorporate all tax changes for 2020. You get walked through the steps, answer the questions and the software handles all the technicalities for you. Of course, there are plenty of options when it comes to the software, so we'll refer you to DoughRoller, who compared seven of the best tax return software programs on the market today.
Note: To get your tax return as fast as possible, file electronically and choose to have your return directly deposited for free into your bank account.
Home Office Credit
Even if you primarily worked from home in 2020, you probably don't want to take the home office deduction. Before the Tax Cuts and Jobs Act of 2017, you could deduct things like your internet or electricity bill if you had to work from home sometimes, for your employer. According to the IRS, “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.” However, if you're self-employed or you have a side hustle in the gig economy, you can deduct certain work-related expenses on your tax return.
If you received unemployment insurance benefits in 2020, you'll be receiving the 1099-G form, which lists the total amount of benefits you were paid. Usually, your unemployment checks are classified as income, but the recently-signed American Rescue Plan made changes to what is considered taxable income. Now, the first $10,200 of unemployment benefits will not be taxed for people who make less than an adjusted gross income of $150,000. If you received unemployment benefits exceeding $10,200, “you will have to report this amount on your tax return, unless you're not required to file a tax return,” says Kemberley Washington, a Certified Public Accountant and financial expert with Forbes Advisor. Unlike paychecks from an employer, taxes for unemployment aren't automatically withheld. While the new tax break will provide a cushion, you could still owe the IRS, or certain states, money.
No. You don't have to pay taxes on any stimulus money you received. The stimulus payment—or economic impact payment, as the IRS calls it—is technically a tax credit. Washington said that a recent Forbes Advisor survey revealed that most people didn't know that. The IRS will use either your 2019 or 2020 tax returns (whichever is on file) to determine your eligibility. Technically speaking, the stimulus payment is an advance tax credit for 2021, but if you end up making more than the income threshold in 2021, she says “you won't have to pay the money back.”
The Ultimate Tax Season Tool
Now’s the time to shred any old documents you don’t plan to keep. The IRS suggests keeping tax returns along with any supporting documents for three years following the date you filed. Depending on the task at hand, you can get a sturdy (but bulky) machine or a handheld (yet therapeutic) device. Amazon Basic’s well-reviewed shredder can devour multiple pages and credit cards. But Muji’s unique handheld shredder makes quick work of old bills, pay stubs and bank documents with a few flicks of the wrist.