It’s Tax Season. Here’s How To Make Sure You File Your 2020 Federal Income Tax Return On Time.
January 29, 2021
Please Consult your Tax Advisor
February is here. That means your inboxes — both physical and virtual — are already filling up with W2s, 1099s, and other tax forms.
After granting an extension to all Americans last year, the IRS is back on schedule. The deadline to file your 2020 federal income tax return is once again Tax Day: April 15, 2021. Given the financial challenges and uncertainties we all faced last year, it’s more imperative than ever to get an early start on completing your return.
If tax season is an anxious time for you, we have some good news. A little planning and organizational know-how can take much of the pain out of tax preparation. Read on to learn more.
How To Keep Track Of Your Tax Documents
- Store your tax documents in a secure but accessible location. If the place you choose to store your tax documents isn’t easy to remember — or reach — you’re at greater risk of losing or overlooking an essential form, schedule, etc. As soon as forms arrive in the mail, move them to a designated file folder or box in your home office. If you don’t have a home office, make room on a closet shelf. Whatever you do, don’t let forms pile up and get lost in the clutter on your kitchen counter.
- Download, print, and store any electronic forms. Now is also an opportune time to review how you’ve chosen to receive your tax forms. For example, check with your financial services providers to see if you’ve opted to receive forms via their digital tax centers. Finally, make a list of the tax documents you receive year in and year out and note whether you receive them in paper or electronic form.
- Group your tax documents by category. Depending on the complexity of your finances, you may want to use separate file folders, boxes, and/or spreadsheets to categorize your documents. If you own more than one business, you’ll need to keep each business’s information separate as well.
- Prepare worksheets and lists for 2020. If you’re going to itemize deductions, it’s a good idea to collect and organize the specific information you need well in advance of April 15. For example, you may need to calculate the square footage of your home office or maintain accurate records of uncompensated medical expenses. In addition to documenting your deductions should the IRS question them, these worksheets and checklists may be helpful in preparing future tax returns.
How To Identify Your Most Essential Tax Documents
Having all pertinent documents on hand in advance of tax preparation helps you file a complete and accurate return.
Additionally, some tax documents you receive are essentially statements — notifications that your financial institution has already supplied the IRS with the information the statement contains. Other forms, of course, are “originals” and must be included with your return. These requirements will vary depending on the type of return you file.
According to the IRS, these essential tax documents include:
- Form W-2, “Wage and Tax Statement,” provided by your employers.
- Form 1099, provided in connection with additional sources of income. You may receive multiple 1099s as well as several different types of 1099 every tax season. The most common 1099s include:
- 1099-DIV, “Dividends and Distributions.” If you hold individual stocks that pay dividends, that income will be reported on this form.
- 1099-G, “Certain Government Payments.” Any unemployment compensation you receive will be reported on this form.
- 1099-INT, “Interest Income.” Interest income includes any interest earned on your savings or money market accounts.
- 1099-NEC, “Nonemployee Compensation.”
- 1099-MISC, “Miscellaneous Information.” Any income you earn from being self-employed or working as a freelancer will be reported on this form.
- 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”
- 1009-S, “Proceeds From Real Estate Transactions.”
- Forms 1095-A, 1095-B, and/or 1095-C. These forms furnish proof that you carried health insurance coverage in 2020. If you wish to claim the premium tax credit (PTC), you must produce one (or more) of these forms.
- Form 1098, “Mortgage Interest Statement.”
- Notice 1044, related to any Economic Impact Payments (EIP), a.k.a., “stimulus checks,” you received in 2020.
A copy of last year’s tax return can also be considered an essential document. Examining that return can quickly reveal the information you’ll need to file this year’s taxes.
Finally, the IRS recommends that you keep copies of tax returns and all supporting documents for at least three years.
How To Account For Your Eligible Expenses And Other Tax Deductions
A tax deduction reduces a filer’s taxable income. Deductions typically fall into three main categories: the standard deduction, itemized deductions, and above-the-line deductions.
The standard deduction is a set amount of money on which you are not taxed. It’s fixed for each tax year and depends on your filing status, age, spouse’s age, citizenship status, and other factors.
Here are the standard deduction amounts for the 2020 taxes you’ll file in 2021.
Itemized deductions are qualified expenses deducted from your adjusted gross income (AGI). These deductions lower your taxable income. Tax filers who don’t take the standard deduction typically choose to itemize deductions because the total of these expenses is greater — and therefore more beneficial — than their eligible standard deduction amount.
Common itemized deductions include:
- Charitable donations.
- Home loan interest payments.
- Medical expenses.
- State and local taxes.
Some filers take above-the-line deductions to reach rather than lower their AGI. If you take above-the-line deductions, you don’t need to itemize them to claim them. Moreover, they’re available to you even if you take the standard deduction.
Common above-the-line deductions include:
- Educator expenses.
- Health savings account (HSA) contributions.
- Individual Retirement Account (IRA) contributions.
- Self-employment deductions.
- Student loan interest payments.
- Charitable contributions.
How To Know Which Filing Option Is Best For You
If you prefer, you can print and fill out paper forms and mail them to the IRS to complete your taxes. Alternatively, you can create an IRS account and submit your tax return electronically.
In addition to the IRS’s e-file option, you can purchase tax preparation software to complete your filing. The cost of these applications varies depending on the software version and included preparation services you purchase. Before going this route, you may want to read both professional and customer reviews of some of the better-known tax preparation software.
How To Determine When To Retain The Services Of A Tax Preparer
While tax filing software and e-filing technology have made tax preparation considerably easier, you may feel that you don’t have the time to handle the task yourself. You may also feel uncomfortable filling out your tax return, fearing mistakes or missed opportunities to maximize your deductions.
If so, you might want to consider turning the task over to a professional tax preparer. Here are some tips from the IRS to help you choose wisely.
- Make sure the preparer has an IRS Preparer Tax Identification Number (PTIN). Only professional tax preparers must have a PTIN. Individuals filing their own taxes do not have to have a PTIN.
- Ask the preparer if they can present a credential. Are they an enrolled agent, CPA, or attorney? Do they belong to a professional organization or attend continuing education classes? The tax code is notoriously complex and subject to changes from year to year. A competent tax professional must be an authority on tax law and 100-percent up-to-date on these changes.
- Check on service fees up-front. Avoid hiring a preparer who bases their fees on a percentage of your tax refund.
- Make sure your preparer offers IRS e-file, and ask that your return be submitted to the IRS electronically.
- Make sure any refund is mailed to you or automatically deposited in your bank account.
- Make sure you can contact your preparer after your return is submitted. This may be important if the IRS raises questions about your return.
- Don’t use a tax preparer who asks you to sign a blank or incomplete form.
- Before signing your tax return, review it and ask questions about any concerns you may have.
- Make sure the preparer signs and includes their PTIN on your return.
How The Federal Stimulus Checks You Received in 2020 Will Impact Your Taxes
The IRS has sent out more than 160 million stimulus payments (or EIP — Economic Impact Payments) since the CARES Act became law in March 2020. Beginning in December, the agency began sending out millions of additional checks. As April 15 approaches, you may be wondering if your stimulus payments are taxable.
The short answer? “No.” According to the IRS, stimulus payments are not classified as income, and taxpayers will not owe taxes on them. Further, stimulus payments will not reduce a taxpayer’s refund or increase the amount they owe when they file for 2020 — or for 2021 in 2022. Finally, since these stimulus payments are not counted as income, they do not affect your government assistance or benefit program eligibility.
That said, any taxpayer who received a stimulus check should keep their Notice 1044 with their 2020 tax records. You may be eligible to claim a Recovery Rebate Credit on your 2020 federal income tax return if:
- Either you did not receive an Economic Impact Payment in 2020;
- Or your Economic Impact Payment was less than $1,200 (or $2,400 for a married couple filing jointly for 2019 or 2018), plus $500 for each qualifying child in your household.
What Else Might Be Different About Your Taxes In 2021?
When the IRS postponed the 2019 filing deadline to July 15, 2020, it was responding to a federally declared disaster. This postponement, in turn, prompted a delay in the issuing of tax refunds. Consequently, the IRS owed many taxpayers interest on their refunds. If you received one of these interest payments in 2020, it is considered taxable income and must be reported. This requirement applies to anyone who received interest totaling $10 or more.
Taxpayers who don’t itemize their deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations.
When Can You Expect To Receive Your 2020 Tax Refund?
The IRS will begin accepting and processing 2020 federal income tax returns on February 12, 2021.
The IRS reminds all taxpayers that the fastest and safest way to receive a refund is to combine direct deposit with electronic filing. You can track your refund using the government’s “Where’s My Refund?” tool.
Finally, the IRS always cautions taxpayers not to rely on receiving a refund by a specific date, especially when making major purchases or paying bills. Some returns may require additional review and processing and may take longer to protect against identity theft and refund fraud.
If you’re expecting a tax refund this year, we encourage you to add it to your emergency fund — or use it to create one. Guaranty Bank & Trust offers a variety of personal banking products optimized to help you grow your savings. Opening an account takes as little as five minutes. And remember: when you choose to bank with Guaranty, you’re joining a community whose members have been helping their fellow Texans prosper for over a century. Learn more about the advantages of banking local by calling our Customer Care Center at 888-572-9881 or booking a video appointment with one of our friendly, caring, and collaborative financial experts.