Believe it or not, there is good news about taxes this year, and you do not have to pay extra to your accountant or open an offshore bank account to take advantage of it. Nope – it is all out there in the open, just waiting for inquisitive minds to put it to work.
After April 15, the best news about tax season is usually that it is over. But that’s part of the good news for your 2020 taxes: Largely because of the COVID-19 pandemic, the IRS has again extended the filing deadline for individuals to May 17, 2021.
There is other good news too, and a little bit of bad (sorry). Here is what you should know as we head into the last few weeks of the 2021 tax season. As always, this is general guidance; your situation could be different. Be sure to check with a tax professional to make sure it applies to you.
First, the Good News
- You get a bigger standard deduction
If you are not itemizing deductions, you can subtract this amount from your income right off the bat. It went up by a couple hundred dollars this year, but it is better than nothing – unless your itemized deductions add up to more. Then you should skip this and itemize instead.
- You do not have to pay tax on your stimulus checks
Were you one of the Americans who got up to $1,200 in COVID-19 relief money from the $2 trillion CARES Act (Coronavirus Aid, Relief, and Economic Security Act) relief package last year? You will be glad to know you do not have to pay taxes on it. The IRS has classified it as a refundable tax credit that you probably would have gotten anyway.
- Business owners can deduct PPP expenses
If your business was hurt by the pandemic and you got a loan through from the Paycheck Protection Program (PPP), you can get the loan forgiven. There was a question whether that meant you cannot deduct business expenses paid with the loan, since it could be argued that a forgiven loan is like income. However, the IRS has decided you can deduct those expenses after all. Just remember: The loan forgiveness is not automatic. You must apply for it with the Small Business Administration.
- Unemployment benefits are not taxed
If you were one of the millions who lost their job last year and got unemployment benefits, it looked at first like you were going to be stuck paying income tax on the benefits – standard procedure in the past. But with such a staggering number of people out of work, the rule was softened by the American Rescue Plan that passed in March 2020. The first $10,200 of unemployment benefits are tax-free if you make less than $150,000 a year. Of course, that means you will have to pay tax on anything over $10,200. Here is hoping you are now gainfully employed and do not have to worry about that!
- You can deduct more of your charitable donations
Another COVID benefit is that, if you itemize deductions and gave to charity, you can deduct up to 100% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. If you only take the standard deduction, you can still write off up to $300 of qualified charitable contributions. Another good reason to give to charitable organizations.
Now, the Bad News
- Sorry, you cannot deduct work-from-home expenses
Did your employer send everyone home to work remotely during the pandemic? Did the TV room become your home office? Unfortunately, you cannot take the home office deduction unless you are self-employed.
A Little Good, a Little Bad
- Retirement withdrawals
About your 401(k) and Roth IRA: If you are at least 59 1/2 years old, the CARES Act allowed you take out up to $100,000 until the end of 2020 without having to pay the early withdrawal penalty. But you will still have to pay income tax on the money – so think carefully about whether you really need to raid your retirement.
About your traditional IRA: You can now wait a little longer – until age 72 instead of 70 1/2 – to take the required minimum distribution (RMD) of your money. Under the SECURE Act, you can wait. Plus, the CARES Act allowed seniors to skip RMDs altogether in 2020. But of course, when you do start withdrawing your money, you will have to pay taxes on it.
And some really good news: Did you find you had to take money out of your retirement fund? You will have to pay taxes on it, but if you put the money back within three years you can get a refund on any taxes you paid.
No News Is Good News
The rules have not changed much for tax deductions and credits, but it pays (literally) to be aware of them. They both save you money at tax time. The big difference is when you take them.
Tax deductions are subtracted from your taxable income and are taken as you calculate your tax bill.
Tax credits are subtracted after you figure out what you owe. You can end up getting a tax refund if your credits add up to more than the tax you owe. But beware the nonrefundable tax credit! This will cut your tax bill, but it will be subtracted from your refund, so you get back less. Talk to your tax professional for more guidance on this!
Here are three common deductions and credits you may be able to take:
- Medical Deductions: You can deduct medical expenses if they total more than 7.5% of your adjusted gross income. But you must itemize your deductions in order to write these off.
- Earned Income Tax Credit: This was created to help low- and middle-income workers, and whether you can take it depends on your income and family size. You can save a few hundred or a few thousand dollars on your taxes. Many people are not aware they are eligible for this – talk to your tax professional to see if you are.
- Child Tax Credit: Got kids? For 2020 taxes, families can claim up to $2,000 per qualified child as a tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples). And since this is a refundable credit, your family can receive up to $1,400 per child as a refund. Due to the passing of the American Rescue Plan, the child tax credit is set to change for 2021 taxes. The per child credit will go up to $3,000 or $3,600 depending on the child’s age.
We have just skimmed the surface of the tax information you need to reduce what you owe this year. Although filing your income taxes are best done by an accountant, tax questions often intersect with estate planning and inheritance laws. For help making tax season a little less taxing, contact OC Estate & Elder Law at (954)251-0332 or email@example.com for a free phone consultation. Our attorneys are fluent in English, Spanish, and Russian.