It’s not a bold statement to say that 2020 is a bizarre and memorable year. Let’s face it, if anything, that’s an understatement. A lot of people are primarily focused on just simply getting it through the year. Still, it is never too early to start turning your eye towards preparing your 2020 tax return sometime in 2021 (after all, our traditional April tax date was moved this year!). With all the strangeness of 2020, there are some unusual tips to keep in mind for tax preparation for 2021.
1) Remember, Unemployment Benefits Will Be Taxed
This year, the coronavirus pandemic saw spikes in unemployment. Although for many, this has proven to be temporary, many in the workforce had to apply for unemployment. To bolster the economy, the government provided an extra $600 to unemployment insurance in the CARES Act. One thing that many people aren’t aware of is the fact that this money is subject to federal and possibly state taxes, but those taxes aren’t automatically withheld like most of our paychecks. This can lead to some people getting an unexpected tax bill in 2021. There are a couple of solutions – prepare as best as possible for it with a savings account or even ask to have 10% of your unemployment withheld to cover taxes. This will save you from a nasty tax surprise.
2) The Landscape is Constantly Changing
At the time of writing, there are still negotiations on another stimulus bill ongoing and talks of executive orders implementing extensions to unemployment boosts or payroll tax cuts. If 2020 has shown us anything, it is that anything can happen. Keep an eye on anything that happens in the second half of the year and be aware of how it may impact the 2020 tax credit.
3) Charitable Donation Deductions Will Be Available To All
A large number of taxpayers normally take the standard deduction available to them, rather than itemizing their return. Previously, that has made it so that the deduction for donations to a charity isn’t worthwhile. However, to encourage increased money to nonprofits, the 2020 tax return will allow an increased write-off for a charitable donation of up to $300. Even more, this will apply to people who take a standard deduction as well as an itemized one. This is a noteworthy change to keep in mind.
4) Check Your Withholding Amounts
Recent changes to the tax code made it so many people had an issue with their withholdings, finding a nasty tax bill surprise. The IRS recently released a new withholding estimator tool to help you strike the right balance to avoid a nasty surprise or to prevent yourself from taking too little in take-home pay during the year. Using this tool can avoid a big bill in 2021.
5) Save For Retirement If You Can
One of the changes for 2021’s filing season is increased limits for tax-free contributions to 401k accounts, and that is a definite benefit for the future. The increases aren’t much, but if you can, you always want to take the maximum advantage of this savings plan.
The landscape of 2020 is ever-evolving, but it never hurts to have a plan for tax filing season in 2021. We can help navigate your questions! Contact us with your questions or concerns!