8 Things You Need to Know Before You File Your 2020 Tax Return
By any standard, 2020 was an unusual year, marked by rapid change and unexpected events. As a result, filing your tax return may be anything but straightforward. Below we explore eight things you need to know before filing your return—and a few things to keep in mind for your 2021 planning.
1. Don't miss the filing deadline.
There was an extension for the tax-filing deadline in 2020, but this year, so far, the deadline remains April 15. If you file after that date without having asked for an extension, you'll have to pay a late filing fee, which is 5% of the taxes you owe for each month, or part of a month, that your return is late. That penalty starts accruing the day after the tax filing deadline and can build up to a maximum of 25% of your unpaid taxes.1
2. Stimulus payments are tax free.
If you were one of the millions of Americans who received an Economic Impact Payment, those are tax-free. If you didn’t get a payment, or received less than the full amount you were eligible for, you may be able to claim the Recovery Rebate Credit based on your 2020 tax information. To do so, you must file a federal tax return.
3. Unemployment benefits are taxable.
If you lost your job last year and qualified for the extra $600 a week in unemployment benefits, you’ll need to report that income on your 2020 federal tax return (and state return, if applicable). You’ll receive a Form 1099-G, which will tell you the amount of benefits you received in 2020, and how much was withheld for taxes.2
4. The standard deduction increased.
The standard deduction typically increases each year due to inflation, and last year was no exception. For 2020, the standard deduction rose to $12,400 for individuals ($24,800 for married couples filing jointly). Taxpayers age 65 or older are eligible for an even higher standard deduction, $14,050 for individuals and $27,400 for married couples filing jointly.3 If your deductions exceed the standard deduction for your filing status, consider itemizing on your return.
5. More taxpayers can deduct charitable contributions.
Under a provision in the CARES Act, which was signed into law in March of last year, you can deduct up to $300 for cash contributions to qualified charities if you do not itemize on your 2020 return.4 Previously, charitable deductions were only available to those who itemized. It gets even better in 2021. Joint filers who do not itemize will be allowed to take an above-the-line deduction of up to $600 in cash contributions made to qualifying charities this year.5
If you itemize and made charitable contributions in 2020, you can deduct contributions up to 100% of your adjusted gross income (AGI). This provision has also been extended for tax year 2021. (Prior to the passage of the CARES Act, you could only deduct up to 60% of your AGI for charitable contributions.)4
6. Don't overlook the child tax credit.
Many families may be eligible for a child tax credit of $2,000 for each child under age 17. To claim the credit, you must determine if your child is eligible, based on seven considerations: age, relationship, support, dependent status, citizenship, length of residency and family income (individuals must make less than $200,000 a year and couples must make under $400,000). You and/or your child must qualify for all seven to claim this tax credit.6
7. The threshold for medical expenses is permanently reduced.
While the Tax Cuts and Jobs Act of 2017 reduced the income threshold for unreimbursed medical expenses to 7.5% of AGI for tax years 2019 and 2020, it was set to increase to 10% in 2021. However, new legislation signed into law in December permanently lowered the threshold to 7.5%.7
8. Need more time?
Regardless of income, taxpayers can use Free File, a service available through the IRS, to electronically request an automatic tax-filing extension. Filing this form gives you until October 15, 2021 to file a return. However, there’s a catch. If you owe taxes, you’ll need to pay the estimated amount at the time you file for an extension or face penalties.
For more information on filing your 2020 tax returns, visit IRS.gov or schedule time to meet with a tax professional. To learn more about managing your tax burden throughout the year with tax-smart financial and investment strategies, contact the office to schedule time to talk.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Financial Watch | February 2021
February 19, 2021|