Taxes — like everything else — may look a bit different this year. Between stimulus checks, a spike in Americans receiving unemployment benefits, and other variants affecting income, it makes sense if you have questions or need extra help filing your taxes in 2021.
Here are some basic tips on how to navigate the tax landscape this season. Although it can be nerve-wracking, don’t panic! There are tons of resources online, as well as seasoned financial professionals such as Lora Vega, CPA, who are eager to help you get everything sorted. Together, you’ll be on a clear path to properly-filed taxes (and hopefully a satisfying refund).
Preparing Your Documents
The most important thing when preparing your taxes each year is making sure you have all of the correct documents. Getting these records in order early can guarantee a complete and accurate return, as well as inhibit any delays on your refund.
The most common document used to report income is a Form W-2. W-2s report wages paid to an employee and the taxes withheld. This form should be provided by your employer.
Next are the 1099 forms. Any kind of 1099 is used to report income outside of a regular salary or wage. There are different forms for the different types of income, such as the 1099-MISC for miscellaneous income; the 1099-INT for interest income; the 1099-NEC for nonemployee compensation; and the 1099-G for certain government payments (such as unemployment benefits). These forms should be provided to you by the payer (i.e. your contract employer, unemployment, etc.).
A Form 1095-A will be required for anyone receiving Health Insurance Marketplace coverage (Obamacare). This form reports information about the individual receiving marketplace healthcare and allows you to take the premium tax credit or reconcile the credit on your returns with advance credit payments.
Finally, you will need copies of any other documents that support income, deductions, or credits on your tax return. This can include receipts, canceled checks, records of cryptocurrency transactions, and income statements from the gig economy.
New This Year
The number one question on everyone’s mind right now is if they have to report any stimulus payments on their 2021 tax returns and, if so, how?
The short answer is no. According to an article from Money, the two government stimulus checks are not taxable. However, if you received an incorrect amount of money within either of those payments or you did not receive one at all but you should have, you may be entitled to a rebate credit.
In addition to the stimulus payments, the Coronavirus Aid, Relief, and Economic Security (CARES) Act affects how you report charitable donations or withdrawals from a retirement account on your 2021 taxes. Gather up your receipts from any donations made to tax-exempt charities with a 501(c)3 designation to reduce your tax liability. This year, you can deduct up to $300 worth of charitable donations from your adjusted gross income (AGI). If you itemize your donations, you can deduct up to 100 percent of them from your AGI, as opposed to the previous cap of 60 percent.
Also new this year, the CARES Act allowed people to withdraw up to $100,000 from their retirement accounts, including IRAs, 401(k)s, and others, and suspended the 10 percent penalty for early distributions. The IRS says they will tax the withdrawals “ratably over a three-year period, starting with the year in which you receive your distribution,” but you can opt to have it taxed all at once.
The last thing the Internal Revenue Service (IRS) emphasized that might be different this year is refund timing. With so many updates and changes to how taxes are filed in 2021, they caution that your refund may take longer than expected to arrive. They advise filing early, accurately, and online using direct deposit for the quickest refund.
What Small Businesses Need to Know
Many new tax incentives and programs were introduced in the past year to aid small businesses that were suffering due to COVID-19. The biggest thing was the option of Paycheck Protection Program (PPP) loans, introduced within the CARES Act. According to a piece on Business News Daily, the PPP is a forgivable loan meant to supplement payroll, mortgage or rent, and utility payments for a business. This means that any money a business received that was forgiven through the PPP is not considered taxable income.
In contrast, some businesses may have received an Economic Injury Disaster Loan. Funds from this type of loan are taxable and must be reported correctly.
Businesses that paid employees sick-leave, family-leave, qualified healthcare plan expenses, or the employer’s share of FICA taxes for sick-leave expenses they incurred under the Families First Coronavirus Response Act are eligible for tax credits. Businesses that were fully or partially closed due to a government-mandated shutdown may also be entitled to a tax credit under the Employee Retention Tax Credit.
IRS Filing Tools
The IRS provides a variety of tools to help you file this year. The most important one is IRS Free File, which is exactly what it sounds like. This tool allows you to prepare and file your federal income taxes for free online, with options based on your income. Be aware that this tool is strictly for filing federal taxes — depending on where you live, you may need to file state taxes separately. You can also check out the Interactive Tax Assistant, which answers tax questions based on your specific circumstances.
The IRS operates a volunteer income tax assistance program that is available to the elderly, disabled people, people who speak limited English, or people who earn less than $54,000 annually. Just plug your zip code into the Volunteer Income Tax Assistance Locator and find someone near you who can assist with preparation and filing.
If you’re interested in hiring someone to prepare and file your taxes for you, check out the Directory of Federal Tax Return Preparers. This is a directory of professionals based on your location who have select credentials and qualifications as recognized by the IRS. Lora Vega, CPA, is listed here!
To keep tabs on the status of your refund, use the Where’s My Refund? tool. You can begin checking your status 24 hours after you e-file or four weeks after mailing your paper return. Of course, don’t forget this year’s tax filing deadline is the standard April 15, 2021, unless you file for an extension.
For more information about tax preparation or filing your personal or business taxes, contact Lora Vega, CPA, at (520) 271-3230.