Is there anything that didn’t happen in 2020?
Toilet paper hoarding? Check.
Wild and crazy Presidential Elections? Check.
Murder Hornets? Check.
When did anyone have time to think about taxes, even if they had a job or a business that survived the lockdowns? At least Uncle Sam said you don’t have to file until May 17th. That’s why we put together this checklist along with some guidelines and tips. We want to make it easier for you to go back and pick up all the right pieces. At least you get another break on Tax Day. You have an extra month to get everything together and filed.
W-2 Employee, Independent Contractor, or Business Owner?
If you are a W-2 employee, you should have your forms by now from your employer. Independent contractors should have their 1099-MISC forms from anyone they worked for during 2020. Business owners have all the fun of getting their business taxes together.
Being any type of worker in 2020 was a challenge. You may have changed jobs, gone on unemployment, or struggled to keep a business afloat with Payment Protection Program (PPP) loans from the Small Business Association. The more places you received money from, the more paperwork you have.
If you started as a W-2 employee and decided to do gig work, you still have to pay taxes on what you earned. In fact, you need to pay a little more to the IRS because you need to pay both halves of your Social Security and Medicare taxes and withholding.
Get all your documents together. If you ran a business, separate the business documents from the personal so you can file your business taxes without getting things mixed up in your tax returns.
- W-2 statements
- 1099-Misc forms
- Proof of income that wasn’t on either one of those
Reminder about Taxable Income
If you have any investment income outside of an IRA or 401K, remember that the interest is taxable. So are the unemployment benefits you received if you filed during 2020.
Oh, and that interest you received from the IRS for the late Tax Day last year? You know, the interest you got along with your refund for 2019? Yeah, that’s taxable, too. Yes, you have to report it on your return.
You should have received a Form 1099-INT from the IRS, so don’t panic if you can’t find last year’s return.
Unemployment compensation is taxable, too. It must be included as gross income on your tax return unless you requested federal taxes to be withheld when you received the funds. On a bright note, part of the latest COVID relief package makes up to $10,200 of your 2020 unemployment benefits nontaxable for some taxpayers.
What about your “stimmy?” Great news! Your stimulus payments (of which you received two in 2020) are not taxable by the federal government. However, double-check with your state income tax agency to see if you need to send them some of your stimulus.
- 1099-INT from IRS and investments
Credits and Deductions
Tax credits and tax deductions are two different things. A tax credit is a dollar-for-dollar reduction in your tax bill. You get a credit that pays for some of your tax bill if you have one. Some credits are refundable, but many are not. Check the fine print.
The point of a tax credit is to lower your tax bill.
A tax deduction lowers your taxable income and reduces your liability. Therefore, you are taxed on less income and have a lower tax bill. A tax deduction is subtracted from your income before the numbers are run.
The point of a tax deduction is to lower your taxable income.
The Earned Income Tax Credit (EITC) provides qualifying workers with low or moderate incomes a bit of extra money. The EITC is one of the refundable credits. If you have some left over after paying your tax bill, the IRS lets you have the difference.
The Child Tax Credit. Got kids under the age of 17? You can get up to $2,000 per child and $500 for a non-child dependent in 2020. For 2021 you get up to $3,600 per child.
The Employee Retention Credit was part of the CARES Act that provided a refundable tax credit equal to 50% of eligible employers' qualified wages. The Consolidated Appropriations Act of 2021 extended and expanded the availability of the ERC. However, if your business got a PPP loan, you can only claim this credit for wages paid with the proceeds of a PPP loan that has been forgiven.
The Recovery Rebate Credit is for people who were eligible for an Economic Impact Payment (stimulus check) but didn’t get it. (Or they were qualified for a larger stimmy than they got.) The rebate must be reconciled with any rebate credit amount you were eligible for on the rebate worksheet.
The American Opportunity Tax Credit allows you to claim all of the first $2,000 you spent on tuition, books, equipment, and school fees. (Living expenses don’t count.) Also, you can take 25% of the next $2,000 you spent, for a total of $2,500.
There are more credits you may be eligible for. Have your tax preparer or tax software check for you.
If you are taking the standard deduction, skip the following few paragraphs. Except for the special circumstances for charitable cash giving, the deductions below are only for those who itemize their taxes.
The standard deduction for the 2020 tax year is $12,400 to $24,800, depending on your filing status.
The Home Office Deduction became available for a few more people in 2020. If you joined the gig economy and dedicated space in your house for your work, you may qualify for this deduction. Keep track of your office expenses on Schedule C. You may be able to deduct those, too.
Deductions for Charitable Contributions are still available. If you don’t want to itemize, the CARE Act lets you claim a limited deduction on your 2020 tax return for cash contributions made to specific qualifying charitable organizations while claiming the standard deduction. You can claim up to $300 in cash, but the deduction does not apply to donated property.
Did you spend more than 7.5% of your adjustable gross income on qualifying medical care? You might be eligible for the Medical Expenses Deduction. Also, you can deduct your mortgage interest and state and local taxes paid for 2020.
- Eligibility for tax credits
- Potential tax deductions
Wrap It Up
This might be an excellent year to take advantage of a tax professional or some good income tax software. Both can look for potential credits and deductions and let you know if it’s worth it to itemize.
Once you have your taxes completed, file electronically to ensure they get to the IRS as fast as possible. Ask for direct deposit of any refund, so you don’t have to worry about a porch pirate taking your refund check.
- File electronically
- Request direct deposit
If you have any questions, any at all, Top Tax Defenders is ready to answer them.