Smarty Tips for Tax Season

Can you believe it is already time to file your taxes again? There are many changes to consider for the 2020 tax year, starting with the deadline. Unlike last year, there are no planned extensions. You must file your federal tax returns by Monday, May 17, 2021, so we’ve pulled together some smarty tips to help you prepare.

Tax Brackets

Federal income limits for all tax brackets and filers increased to account for inflation.

Deductions and Credits 

The 2020 standard deduction increased to $12,400 for single filers and $24,800 for married couples filing jointly. Other deductions include medical, charitable, and business deductions.

Tax credits to keep in mind include the earned income tax credit and the child tax credit.

Stimulus Checks

For those who received a stimulus check due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it does not count as taxable income. 

PPP Loans

Business owners who received a Paycheck Protection Program (PPP) Loan and used the funds for things business expenses like payroll, rent, and utilities, can apply for forgiveness from the Small Business Administration and once approved, deduct those expenses from your taxable income.

Unemployment Benefits

If you received unemployment benefits last year, you would need to pay income tax on the money you received. If you elected not to have taxes withheld from benefit checks, you’d also be responsible for that money on Tax Day.

State Income Taxes

Relocating to a different state or starting a new job remotely with an out-of-state employer may mean that you need to file tax returns and pay taxes in both states. Be sure to check with your tax professional to learn if the states you were employed have a reciprocity agreement that will allow you to claim credit for taxes paid in another form.

Retirement Plans

The SECURE (Setting Every Community Up for Retirement Enhancement) Act delayed the starting age for required minimum distributions (RMDs) for those with traditional IRAs from 70 ½ to 72 years of age. Additionally, the CARES Act allowed seniors to skip RMDs without penalty in 2020, providing significant tax savings!

Those under the age of 59 ½ and withdrew funds from a retirement plan in 2020 did not have to pay early withdrawal penalties. Still, the funds you received is considered a taxable distribution with the tax liability spread over the next three years or a loan to be paid back over the next three years. Either way, the funds are considered taxable income until the distribution is repaid.

Hopefully, these tips will help you get a jump on your tax preparations so you can finally put 2020 in the rearview mirror. Once you have an idea of what your refund will look like, be sure you keep your New Year’s resolution to make sound financial choices in mind and send those funds directly to your SmartyPig savings accounts!