Category: Tax Brackets

Tax Preparation Tips for 2021 (Part two!)

2/3/2021

We are here to finish up part two of this current blog series dedicated to tips, preparation, and planning for getting through your 2021 tax season!

Hello readers, and welcome back to the blog. With the recent announcement that the very first tax day doesn't begin until February 12th, we've all had a little more time to prepare for doing this year's taxes. We've mentioned and hinted at the fact that this year could be a little more difficult than the last and possibly more difficult than ever before. We understand your worries, concerns, fears, trepidation's, and want to make sure you feel prepared and are prepared for filing your taxes by April 15th of this year. With that in mind, we wanted to offer a few more tips and ideas on how to prepare for doing your upcoming taxes. We also wanted to offer some more information to plan for this whole process as well.

Preparing for your 2021 Tax Season, Continued

Remember that as you are preparing for your taxes, the stimulus money that you received is not being treated as taxable income. It is being treated like money the government would have given you as part of your refund, a sort of tax refund advance you might say.
Many Americans received unemployment benefits throughout 2020 due to losing a job, being furloughed, being unable to work, and being unable to return to work. When you signed up and did your paperwork to begin your unemployment benefits, you had the option of choosing how much you wanted to be taken out of your payments for tax purposes. Depending on how much you allotted the government to take out of these payments will determine how much you'll owe in taxes on your employment benefits. Remember, any unemployment benefits you received last year will count on your tax returns as taxable income.
Many Americans took up a side job or two throughout the pandemic, and are still working them to make up for other lost income. Even if you are self-employed or working for a stand-alone company, you will still be required to pay taxes. You'll receive a 1099 form from the companies you worked for or you'll need to pay a self-employment tax. Make sure to fill out and look out for your 1099 forms, and realize that this self-employment tax is a 15.3% tax that covers your social security and Medicaid taxes, according to Dave Ramsey. If you made more than $400 as a self-employed individual, you'll have to pay taxes on this income. Make sure to discuss this with your tax preparer, and make them aware of how much money you made during self-employment. You could potentially write off up to half of this on your tax return.
Remember, if you're working from home but your employer is in another state you might be looking at paying taxes in more than one state. This can be difficult as each state has different tax laws, which is another great reason to work with a tax professional. We can make sure that no mistakes are made since we are up to date on tax codes and tax laws in each state.
For all of our small business owners or those who work for a company who chose to defer payroll taxes, be advised. If this is something you chose to do, you could see smaller paychecks until these payroll taxes have been paid back. If your company chose to partake in this, you might have seen a little bump in your paychecks throughout last year. This wasn't free money, this was the action of payroll taxes being deferred, and now it's time to pay everything back.
Make sure you choose if you are going to do standard or itemized deductions before filing. Knowing that going into the process can help you organize all of the paperwork you'll need to use for either option ahead of time. While taking the standard deduction is always the easier option, itemizing could allow you to save more money. Just make sure you can prove all of your deductions.
Pick ahead of time if you and your spouse will file together or not. Do your research to see which option is best for you and your family.
If you're planning to prepare your taxes with us or on your own, one of the best ways to get all of your necessary tax documents without having to call the IRS directly is to create an online tax account with the IRS. This will also let you check your payment balance, set up payment arrangements, and view your tax forms and returns from previous years.
Remember that if you don't receive one or both of your stimulus payments, you can claim them on your 2020 tax return through the recovery rebate credit. This will either increase how much your tax refund will be or it will lower how much you owe to the IRS.
The IRS eliminated the 1040EZ and 1040A forms in 2019 and introduced a new form in 2020, the 1040-SR, which is designed for seniors. It has larger print and increased attention to detail to the standard deduction for those 65 years and older. It also added a new question regarding your cryptocurrency. Do not skip this question, the IRS is very aware of cryptocurrency and has been very open about the fact that many tax payers are not being open about reporting their cryptocurrency transactions.
As you're finalizing your paperwork, dotting your I's and crossing your T's, make sure to go back and double-check your work! Check your math, that all names and SSNs are correct, that you've chosen the proper filing status, and that everything is marked appropriately on all of your tax forms, and that you've signed everywhere you need to sign.

Preparation to Planning
Now that you have some excellent tips and suggestions on how to prepare your taxes, how about starting to plan for them? Thanks to both the CARES and SECURE Acts, there is a lot to plan for 2021!

First of all, you'll need to keep your eyes sharp. Both the SECURE and CARES Act brought a good amount of changes into tax law. SECURE was passed in late December of 2019 and it expanded retirement saving options and provided the option for individuals to adjust their tax and estate plans.
If you decide to take a CRD or a Corona Virus Related Disruption in 2020, you can recognize the income over three years or recognize it all this year for tax purposes. If you could potentially be in a higher tax bracket over the next few years, it might be best to recognize all of it this year.
Married taxpayers that have taxable income below $80,000 and $40,000 and below for individuals are allowed to realize tax-free long term capital gains this year. If your income goes above this over the next few years, your long term gains could be subject to a 15% tax rate.
A very beneficial advantage of gifting a 529 college savings plan right now is that five years' worth of gifts can be made in a single year. At one time, a taxpayer can gift up to $75,000 in one sitting to a 529 college savings plan, and if the gift comes from a couple it can be doubled!
You do have the option to defer the current year's tax liability to another year, which will increase your availability for cash investments, personal needs, or business. This is something that can help right now for those still struggling with Covid related financial strain.
Due to the changes of the SECURE Act, IRA and 401(k) accounts might have to be cleared out within ten years of the death of the owner. Exceptions include payouts over the beneficiary's lifetime for spouses, minor children until they're 18, and for the disabled or chronically ill.
Be prepared and familiarize yourself with tax bracket changes that came in with 2020 and how your financial standings might have changed within this bracket due to the financial hit the pandemic caused.
The standard deduction has gone up for all filing statuses. Single and married but filing separately filers deductions went up $200, those married and filing jointly will see an increase of $400, and filing as head of household will see an increase of $300. The standard deduction for single filers is $12,400 and $24,800 for married couples filing together.
Please note that the income tax brackets have increased due to inflation.
2020 caused millions of Americans to spend time in the hospital, and if you've found yourself stuck with a pile of medical bills you might be in luck. You will be able to deduct any medical expenses that are 7.5% above your adjusted gross income or your AGI.
Your children can help you when filing your taxes! Families can claim up to $2,000 per eligible child. Also, because this is considered a refundable credit, your family might be able to receive up to $1,400 per child as a refund!
For businesses that received PPP loan money, according to the IRS, any expenses you paid with money from these loans can't be deducted from your taxable income.
Please remember if you did take money out of your IRA or 401(k) during 2020, don't dread a huge tax bill coming your way. You have three years to return these funds and to get a refund on the taxes you might have paid on that money!

2020 was a difficult year, and we imagine that we'll be feeling its effects for a long time to come. Our goal through these two blogs, and more to come, is to help with the potential shock or difficulties that could potentially come your way for this tax season. Please know that all of us at Hoods are here to help you, and we want to help you receive your tax return as quickly as possible! Please reach out to us if you'd like to begin working with us or have any questions or comments! Is there a topic about taxes that you would like to learn more about? Let us know and comment below! Remember, if you are looking for the best accounting services in Goose Creek, the best tax preparation in Goose Creek, business consulting in Goose Creek, bookkeeping in Goose Creek, or payroll services in Goose Creek, we are here for you! Our phone lines and inboxes are waiting for you. Don't hesitate! Please stay safe, everyone. We will see you soon!

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