Essential Tax Tips for 2021
Tax time can be stressful. Luckily, licensed CPAs can assist with complicated taxes and tax prep software companies can help streamline the process. We sat down with an expert and learned what to expect when filing your 2020 taxes. If you received partial or no stimulus checks last year, heed the expert’s advice! Being prepared is better than charging in at full speed without the essential tools and knowledge. We’ve also listed four must-know tax tips to have under your belt during tax season.
Expert Advice From a Licensed CPA
We spoke to Remington Mosey, a licensed CPA with Lavine, Lofgren, Morris & Engelberg, LLP, about what individual taxpayers should look out for when filing their 2020 tax returns this year. She emphasized the importance of making sure that taxpayers address the recovery rebate credit when filing their tax returns.
“This credit is more known to everyone as the stimulus payments. Some received full payments, others received partial, [and] others have yet to receive their payments. Taxpayers can claim the credit on their 2020 tax return if they only received partial or none of the stimulus payments. Of course, there are limitations for eligibility," Mosey told Savvy. She shared that there are plenty of tools on the IRS website to check eligibility status to max out the credit. “If any taxpayer is unsure of whether they’re eligible, they should consult a tax forum or professional," she added.
The recovery rebate credit is a tax credit, and not a source of income for tax purposes, says Mosey. Taxpayers that end up not eligible when filing their 2020 tax return do not have to pay back any of the stimulus payments they received.
Mosey clarified that stimulus payments are not taxable. “Even if you received them before filing your 2020 tax return and end up having too much income in 2020 to qualify, [it’s] still not taxable income."
Below are some additional tax tips that may be helpful to keep in mind when filing 2020 taxes.
Tip 1: Maxing Out Retirement Plan Contributions
Looking to ramp up your retirement plan contributions? In general, you can contribute as much as $6,000 in your IRA account, and save on taxes. And, if you’re over 50, you can put an additional $6,000 in your 401(k), or $1,000 in your IRA, as advised by CNBC.
When you meet certain requirements and contribute to an IRA before filing your taxes, you can deduct the full amount from your income and not owe taxes on the amount you put into the account, as claimed by Bank Rate.
You can make your IRA contribution during the calendar year and up to the tax day of the following calendar year. This gives you ample time to save and make your contribution. Approximately 10-15% of your annual salary should go toward your retirement savings, according to CNBC.
Tip 2: Request an Extension if Needed
We all get busy or make mistakes. However, ignoring the IRS can lead to an audit or other penalties, back taxes, and other issues.
Make sure you stay on top of notices that you receive. If you simply need an extension on filing your taxes, you can always request one from the IRS. Individual tax filers can use the Free File link from the IRS to request an automatic tax-filing extension, which gives taxpayers until Oct. 15 to file a return. There are also other extension forms by filing status that you can browse here.
Tip 3: Rethinking Your Filing Status
TurboTax suggests taking a closer look at your current filing status, which can have an impact on the funds you receive. If you are married and typically file jointly every year, but are considering filing separately, it might offer some tax savings or a larger deduction. Before deciding to file separate tax returns, be sure to do some more research and figure out the pros and cons. If you choose TurboTax to help you with taxes, they already provide the best possible filing status to get the best refund.
Tip 4: Charitable Contribution Deductions
Thinking of making a charitable contribution? There are new deductions of up to $300 for qualifying charity contributions on individual tax returns, according to TaxAct. Under Sec. 62(a)(22), “eligible individuals may deduct up to $300 in qualified charitable contributions to qualified charitable organizations," as stated by the Journal of Accountancy.
All in all, it’s good to check in with a tax professional or get help from a tax prep company that can help you file your taxes with confidence.