2020 Tax Season Preparation Tips | Jay Santana
Welcome back to Jay’s Tax Insights, where we take the time to break down complex tax items and cover trending tax topics on a monthly basis to provide you with insight on the topic and assist with improving your financial standing for years to come. In today’s blog we focus on 2020 Tax Preparation Tips to consider before April 15, 2021.
2020 Tax Preparation Tips:
As we're all aware, 2020 has been an extraordinarily complex year and as is often the case, that complexity is reflected in taxpayers' tax situations, whether they're businesses or individuals. While there is plenty of time before this year's tax returns need to be filed, the implementation of the two stimulus packages passed in 2020 may mean your tax return may look very different this year. And if you expect your taxes to be more complicated than usual due to unemployment benefits, working more than one job, or receiving government aid, just to name a few examples, it’s critical to prepare in advance to file your taxes (and not least because you can avoid late filing penalties.)
If you are not aware, the Internal Revenue Service announced the nation’s tax season will start on Friday, Feb. 12, 2021, which is when the tax agency will begin accepting and processing 2020 tax year returns. The Feb. 12th start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the Dec. 27 tax law changes and ensure the IRS systems run smoothly. If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers. In addition to knowing this date, I also wanted to take time to highlight key tax dates all taxpayers should be aware of as they embark on this filing season:
Key Filing Season Dates:
Jan. 15: IRS Free File opens. Taxpayers can begin filing returns through Free File partners; tax returns will be transmitted to the IRS starting Feb.12. Tax software companies also are accepting tax filings in advance.
Feb. 12: IRS begins 2021 tax season. Individual tax returns begin being accepted and processing begins.
Feb. 22: Projected date for the IRS.gov Where’s My Refund tool being updated for those claiming EITC and ACTC, also referred to as PATH Act returns.
First week of March. Tax refunds begin reaching those claiming EITC and ACTC (PATH Act returns) for those who file electronically with direct deposit and there are no issues with their tax returns.
April 15: Deadline for filing 2020 tax returns and making 2020 tax return payment.
Oct. 15: Deadline to file for those requesting an extension on their 2020 tax returns (no extension on payment, still due 4/15.)
In addition, below you will find a few tips to consider to ensure you are thoroughly prepared for this tax season:
Contribute to Retirement Accounts:
If you haven’t already funded your retirement account for 2020, do so by April 15, 2021. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.
If you have a Keogh or SEP and you get a filing extension to October 15, 2021, you can wait until then to put 2020 contributions into those accounts.
To start tax-free compounding as quickly as possible, however, don’t wait on making contributions.
Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax deferred. It’s hard to find a better deal.
If you put away $5,000 a year for 20 years in an investment with an average annual 8% return, your $100,000 in contributions will grow to $247,000.
The same investment in a taxable account would grow to only about $194,000 if you’re in the 25% federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
For 2020, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2020 is $57,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2020 tax bill because Roth contributions are not deductible, it could be the better choice because all withdrawals from a Roth can be tax-free in retirement and appreciation also grows tax free. Whereas withdrawals from a traditional IRA are fully taxable in retirement.
To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2020) to a Roth IRA, you must earn $124,000 or less a year if you are single or $196,000 if you’re married and file a joint return.
The amount you save for making a contribution will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $6,000, you will save $1,500 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.
Make a last-minute Estimated Tax Payment
If you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. Plus, you might owe significant interest and penalties, too.
According to IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty.
If your adjusted gross income for 2019 was more than $150,000, you have to pay more than 110% of your 2019 tax liability to be protected from a tax year 2020 underpayment penalty.
If you made an estimated payment on January 15, you erased any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then.
But, if your income windfall arrived after August 31, 2020, you can file Form 2210: Underpayment of Estimated Tax to annualize your estimated tax liability, and possibly reduce any extra charges.
A note of caution: Try not to pay too much. It’s better to owe the government a little rather than to expect a refund. Remember, the IRS doesn’t give you a dime of interest when it borrows your money.
Organize your Records and Provide to Tax Preparer Early:
Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on.
How do you get started?
Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return.
Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important.
Collect receipts and information that you have piled up during the year.
Group similar documents together, putting them in different file folders if there are enough papers.
Make sure you know the price you paid for any stocks or funds you have sold. If you don’t, call your broker before you start to prepare your tax return.
Know the details on income from rental properties. Don’t assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files.
Once all of your information is gathered, if you have a tax preparer, aim to provide them the records early, this will allow for a well- prepared return and additional time to discuss value add items to consider prior to filing the return.
Itemize your Tax Deductions:
It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.
Itemizing is worth it when your qualified expenses add up to more than the 2020 standard deduction of $12,400 for most singles and $24,800 for most married couples filing jointly.
Many deductions are well known, such as those for mortgage interest and charitable donations.
You can also deduct the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2020.
Provide Dependent Taxpayer IDs on your Tax Return:
Be sure to plug in Taxpayer Identification Numbers (usually Social Security Numbers) for your children and other dependents on your return. Otherwise, the IRS will deny any dependent credits that you might be due, such as the Child Tax Credit.
Be especially careful if you are divorced. Only one of you can claim your children as dependents, and the IRS has been checking closely lately to make sure spouses aren’t both using their children as a deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, it’s highly likely that the processing of your return (and any refund you’re expecting) will come to a screeching halt while the IRS contacts you to straighten things out.
After you have a baby, be sure to file for your child's Social Security card right away so you have the number ready at tax time. Many hospitals will do this automatically for you.
If you don’t have the number you need by the tax filing deadline, the IRS says you should file for an extension rather than sending in a return without a required Social Security number.
File and Pay on Time:
If you can’t finish your return on time, make sure you file Form 4868 by April 15, 2021. Form 4868 gives you an extension of the filing deadline until October 15, 2021. On the form, you need to make a reasonable estimate of your tax liability for 2020 and pay any balance due with your request. Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS.
If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5% per month of the tax owed and a late-payment penalty of 0.5% a month of the tax due.
The maximum late filing penalty is 22.5% and the late-payment penalty tops out at 25%.
By filing Form 4868, you stop the clock running on the costly late-filing penalty.
The Bottom Line:
Whether you do your own taxes or hire someone else to handle it, keeping good records will save you time and, in the case of a paid preparer, money. The earlier you start, the more smoothly it should go, and the sooner you'll have put the process behind you for another year.
If you are concerned about preparing your own return or if you may have any questions regarding the topics discussed above, please feel free to reach out to our team at the link below.
