Broker of the Week Oanda - Read Full Review

Free Top Brokers Comparison Service

HELP ME CHOOSE START QUIZ

Counting on a tax refund or stimulus check? 5 things to know before filing your taxes

[ad_1]

This year’s tax season will start against a very different backdrop.

Approximately 18 million people are on some form of unemployment assistance and savings rates are drooping along with personal income. Between August and December, a growing number of people said it’s hard paying for usual household expenses.

Income tax refunds — and claims on missed stimulus checks — may not be a welcome surge in cash this year. They might be a financial lifeline.

Refunds last year averaged $2,535, which is more than the first $1,200 stimulus check and the second $600 payment combined.

The Internal Revenue Service knows the stakes going into Feb. 12, the date when it will start accepting and processing returns. This is “one of the nation’s most important filing seasons ever,” IRS Commissioner Charles Rettig said.

Along with the new context this year, there are some new rules and provisions. Here’s what to know to make the most out of a tax season that has a lot riding on it.

You might need extra paperwork on top of a W-2 form

Of course, there are the usual tax documents to gather. Those include W-2s to show wages and withholdings, and 1099s for independent contractors and gig workers.

But if someone turned to gig work in 2020 to make up for lost income elsewhere, they might not realize the range of deductible business expenses that can shrink their self-employment taxes and their income taxes, according to Nancy Rossner, senior staff attorney at the Community Tax Law Project, which offers legal help to low-income tax filers in Virginia.

For example, if someone became a driver for companies such as Uber
UBER,
+0.14%
and Lyft
LYFT,
-0.04%,
their expenses for cleaning supplies would be tax deductible, as well as mileage when the vehicle is used for business purposes. More information on IRS rules for gig workers can be found here.

Another important document is the 1099-G, a form summarizing the 2020 amount of unemployment insurance payments to a person and how much they withheld for income taxes.

State labor agencies administering unemployment claims will send the form, Rossner said. She’s concerned there may be unemployment recipients who didn’t withhold for income taxes and could now face a tax bill. “That’s something we’ve been worried about in our community,” she said.

Taxpayers should file electronically and include direct
deposit information for the quickest turnaround, the IRS says.

Find this important form if you are seeking more stimulus check money

There are a variety of reasons why people might have missed out on all or some of a first- or second-round stimulus check.

For example, they may have earned too much money when the IRS reviewed 2018 or 2019 tax returns to distribute the $1,200 check and the 2019 returns for the $600 check. Or, the payments might not account for a recently-born child. Or, if they didn’t file taxes before, they might have missed the Nov. 21 deadline to register payment information with the IRS.

All these people can seek the payment as a “Recovery Rebate Credit” when filing their 2020 returns.

To do that, the IRS says they ought to hold onto a form the agency sends out to recipients documenting the payments. There’s Notice 1444 for the first round of payments and there’s Notice 1444-B for the second one. These documents say the amount paid, how the amount was paid and how to report unreceived payments.

The IRS says it mails the notice to every recipient’s last known address within 15 days from the time it sends out the payment.

In the upcoming weeks, people who have created online accounts with the agency will be able to see the amounts they have been paid, the IRS said.

Get ready for a
potential ‘shock’ if the stimulus check money comes via a tax refund

When the IRS started making stimulus payments, it made it clear these sums didn’t count as taxable income and wouldn’t influence the size of a person’s future refund. Furthermore, rules on the second round of payments made it clear the $600 check wouldn’t be subject to garnishments or past-due child support.

But some things change when people rake in the missed-out stimulus check money via their tax return.

As the Ways and Means Committee explains, the “true up amounts” from the Recovery Rebate Credit are folded into the taxpayer’s income tax refund. And once the stimulus money falls into that pot of money for an income tax refund, it’s “subject to the garnishment and offset rules that generally apply to federal income tax refunds,” the committee said.

The IRS says it can reduce refunds to pay for things like past-due child support, state income tax debts and other non-tax debts owed to the federal government.

The Recovery Rebate Credit is “just like any other credit you take on your tax returns,” said Caleb Smith, an associate clinical professor at University of Minnesota Law School. Defaulted student loans are generally another reason for an offset, but Smith said it wasn’t immediately clear how the rules applied to those defaults given the pause on student loan payments.

The potential for offsets “is going to be shock for some people
that it’s not going to be protected,” Rossner said, adding that the scenario “does
seem unfair, it does seem inequitable.”

Be aware of changes to tax credits for low- and moderate-income households

One result of the $900 billion rescue bill enacted in
December was a “look back” provision on the Earned Income Tax Credit (EITC) and
the Child Tax Credit, two credits aimed at working-class families.

Both credits are pegged to earned income, so the pandemic
put credit recipients in danger of first losing their job and then seeing their
tax credit money diminish because they lost their job.

“It’s safe to say the architects of the Earned Income Tax Credit, I’m not sure they anticipated an event like we been through in the past year,” said Timothy Flacke, executive director of Commonwealth, a nonprofit organization focused on financial security.

For that reason, lawmakers in the $900 billion relief package said people claiming the credit can “look back” to their 2019 return and apply the earned income amount there to the 2020 return.

The provision only works if people are aware of it, said
Flacke. He advises people to have their 2019 return handy so a tax professional
can see if it’s best to use the look back provision.

“Most of us are going to get help. Just bring the document,” Flacke said. What he worries about is a scenario where a person has their tax appointment, but not their past return and they just want to get their 2020 return wrapped up — “and there are literally thousands of dollars on the line.”

The refunds for returns claiming the EITC are scheduled to arrive in bank accounts starting the first week of March. President Joe Biden wants to boost payouts for both credits, but that will require Congressional approval.

Don’t forget your
charitable contributions

Charitable contributions were already deductible, but changes in the CARES Act sweetened the tax incentives for many people.

Under the CARES Act, taxpayers filing their 2020 returns could take the standard deduction — which is what most do — and also deduct up to $300 in charitable contributions. Before the change, it only made tax sense to write off the contributions if you were itemizing your deductions.

In one hypothetical case, taxpayers making $100,000 could reduce their tax bill by $66 if they donated $300 through the year.

Teachers could also be eligible for a second “above the line” deduction this year. Educators can take the standard deduction and also claim up to $250 for unreimbursed educational expenses. That could be books, classroom materials and computer expenses.

Robert Greene, an accountant specializing in teachers’ tax returns, said educators should feel free this year to include their out-of-pocket costs on hand sanitizers, masks and other sorts of personal protective equipment.

“It’s really any supplies the teacher deems “ordinary and necessary,” he said.   

[ad_2]

Source link

We will be happy to hear your thoughts

      Leave a reply

      Trading foreign exchange on margin carries a HIGH LEVEL OF RISK, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

      Advertiser Disclosure: Brokerspilot.com helps investors across the globe by spending over hours each month testing and researching online brokers.

      How do we make money? Our partners compensate us through paid advertising.

      While partners may pay to provide offers or be featured, e.g. exclusive offers, they cannot pay to alter our recommendations, advice, ratings, or any other content throughout the site.

      Furthermore, our content and research teams do not participate in any advertising planning nor are they permitted access to advertising campaign data.

      Disclaimer: It is our organization’s primary mission to provide reviews, commentary, and analysis that are unbiased and objective.

      While Brokerspilot.com has some data verified by industry participants, it can vary from time to time.

      Operating as an online business, this site may be compensated through third-party advertisers.

      Our receipt of such compensation shall not be construed as an endorsement or recommendation by Brokerspilot.com, nor shall it bias our reviews, analysis, and opinions.

      en_USEnglish
      Best Forex Brokers Reviews
      Logo
      Reset Password
      Compare items
      • Total (0)
      Compare
      0