Best Practices for Filing Your 2020 Taxes
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Taxes may look a bit different and complicated this year, given the unprecedented amount of unemployment claims, business closures, and other financial impacts during a global pandemic. To say we’ve had a stressful year would be an understatement. If you’re braving through your taxes alone this year, there are many tax prep tools and resources to help you save time and money.
When in doubt, always consult with a certified public accountant (CPA) or tax professional that can best advise you on financial and tax matters. And, always try to get your taxes done ahead of time so you don’t get overwhelmed or end up getting penalized. To keep you organized and ready to file your taxes, we’ve compiled a helpful guide with tips and crucial points to consider when filing your taxes this year.
Note: Please consult with a tax professional for up-to-date information. These are just some tips/resources we’ve compiled after a thorough Internet search and from personal experience. We are not financial experts, so please double-check with a licensed tax professional that can better advise you on tax matters.
What Tax Prep Resources Are Out There? Do You Need a CPA?
To start, figure out how much you’re willing to spend on filing your taxes and whether you feel comfortable using a tax prep software program.
Once you’ve identified whether you need a CPA or want to file on your own, you can shop for tax software or find a licensed tax professional. This can be done through word-of-mouth or a simple Google or Yelp search. Some software programs will also connect you to a CPA as well.
With a certified CPA, there’s minimal room for errors, and going the solo tax filing route can prove to be challenging for some. Typically, you’ll provide important tax information to your accountant and they’ll input and handle the heavy lifting for you. Usually, they’ll also go over your refund and other details for accuracy.
For more resources and guidance, check out our guide on Essential Tax Tips for 2021. Some of the big-name tax prep companies and accounting firms include:
Things to Know When Filing Taxes During Pandemic Circumstances
It’s always best to stay ahead of tax filing season so you can avoid penalties. In general, it’s important to document and keep all of your pay stubs in handy to check and see whether you had enough tax withheld from your paycheck, or whether you may end up owing a chunk of taxes to the IRS. If you have a W-2, things may be a bit straightforward compared to those with several revenue sources and 1099 income to report.
If you anticipate that your taxes may be complicated, you may need to hire a tax professional that can help sort through your taxes and ensure the filing is accurate.
Cut Your Tax Bill
If money is tight this year and you can’t afford to hire a tax professional, no worries. Free File Alliance and Volunteer Income Tax Assistance are organizations that partner with the IRS to help you file your tax returns. (Some restrictions for qualifying such as annual yearly income may apply). There are also tons of other resources to help you prepare your taxes.
Consider filing your own taxes using an e-filing method or a popular tax filing software like TurboTax or E-File if your taxes are not that complicated. You can also save and prepare your federal income tax online for free, according to the IRS’ Free File program.
Filing Taxes as a Freelancer or Independent Contractor
If you work freelance and have different sources of income, it’s important to keep track of your income by opening up a separate business account, or itemizing and keeping a running log of deposits to keep track of miscellaneous income.
Typically, if you’ve received funds for freelance or other independent contractor services through PayPal, you should receive a 1099-K form for filing taxes if you’ve reached a certain threshold amount. Through PayPal, in order for the 1099-K to be issued, transactions need to amount to approximately 200 and the funds need to reach a threshold of at least $20,000 in PayPal. If not, you’d have to itemize the deposits or consult with a CPA to better assist. (Heads up: If you are a freelancer, you may be required to provide a quarterly estimate of possible earnings to the IRS. Please consult with your tax professional for more information).
Stimulus Checks vs. Taxable Income
With the impact of COVID-19, many of us have received stimulus payments or Economic Impact Payments through the CARES Act. According to Forbes, the payment is not included in your gross income, so you don’t need to include the payment as taxable income, or pay income tax on the payment.
What You Need to Know if You Filed for Unemployment Benefits
COVID-19 has impacted many individuals and businesses. If you received unemployment benefits, your tax refund may be impacted. Keep in mind that unemployment benefits are taxable. As a tip, double-check to see if you had your tax withheld from your benefits or whether you owe taxes on unemployment income when filing for your federal income tax return this year.
According to the IRS, “by law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act." If you received unemployment benefits, you should receive a Form 1099-G Certain Government Payments PDF, according to the IRS. This information shows whether federal income tax was withheld along with information about the total unemployment compensation earned in 2020.