What to Expect When Filing Your Taxes This Year
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We all know that 2020 was a difficult year. Well, we have one more thing to wrap up before we completely put 2020 behind us—tax season.
As of February 12, you can officially file your 2020 tax return. It’s important to note changes following the December 2020 tax law modifications that provided a second round of Economic Impact Payments, and other benefits that could impact your 2020 tax return.
Whether you’re expecting a big check from the IRS or if you’re panicking because you owe money, here’s what you can expect when filing your taxes this year:
Adjusted Income Brackets
We all see the impacts of inflation in our everyday spending—from groceries to housing. Fortunately, the IRS understands the need to change tax brackets to keep up the pace of the current value of the U.S. dollar. So, income brackets did increase in 2020 to accommodate inflation.
So, how do these tax brackets work? To put it simply, the U.S. government decides how much tax you owe each year by dividing your taxable income into sections (or tax brackets). Where each bracket begins (and ends) is based on your filing status.
As a refresher, your tax rate (the percentage of your income you pay in taxes) is based on which tax bracket (income range) you are in. Here’s how the tax brackets are broken down from the IRS for 2020:
Changes in Standard Deductions
Tax deductions help lower the amount of income subject to federal income taxes. When filing your taxes, you have the option of either taking a standard deduction or itemizing deductions. The standard deduction lowers your income by one fixed amount and is a “no-questions-asked” reduction.
The standard deduction for 2020 increased to $12,400 (up from $12,200 in 2019) for single filers and $24,800 (up from $24,400 in 2019) for married couples filing jointly which could help reduce your taxable income.
If you choose to itemize your deductions, you will provide a detailed list of eligible expenses. You will only itemize your taxes if your deductions add up to be more than the standard deduction. There are a lot of possible deductions that can be itemized such as personal property taxes and mortgage interest (if you’re a homeowner), medical expenses, state and local taxes, charitable contributions, etc.
How the Coronavirus Impacted Your Taxes
Stimulus Checks: If you received Economic Income Payments (stimulus checks) you will want to review the Recovery Rebate Credit guidelines issued by the IRS.
If you received the maximum amount allowed by the government, you do not need to include any information about your payments when you file your taxes. However, if you didn’t receive a payment or only received a partial payment, you may be eligible to claim the Recovery Rebate Credit when you file your 2020 tax return.
Tax preparation software (including IRS Free File) or a tax specialist can help you determine the amount. The Recovery Rebate Credit Worksheet in the Form 1040 and Form 1040-R instructions can also help you determine if you are eligible for this credit.
Unemployment Benefits: Unemployment income is subject to taxes and needs to be reported in your 2020 income tax return. With millions of people receiving Pandemic Unemployment Assistance in 2020 due to the coronavirus, many may be looking at smaller refunds (or taxes owed) if taxes were not withheld from those payments.
If you received unemployment benefits in 2020, you’ll likely receive the Form 1099-G that will show how much money you were paid during the year (box 1), and how much money was held for federal income tax (box 4).
Paycheck Protection Program (PPP): Congress passed the PPP to provide economic assistance for small businesses and help preserve jobs for many Americans.
A forgiven PPP is tax exempt (i.e. it is not recognized as a taxable gain or profit). However, using the PPP loan can also reduce the number of tax write-offs you can take on your business. The IRS has said expenses paid from forgiven PPP loans will not be deductible so as a result, you may owe more taxes than you normally would in comparison to previous years.
The PPP Flexibility Act (which went into effect in June 2020) allows you to still defer these taxes after a PPP loan is forgiven. Fifty percent of the deferred taxes that accumulated in 2020 must be paid by December 31, 2021 and the remaining 50 percent of the deferred amount must be paid by December 21, 2022.
Important Dates to Remember
- February 12, 2021: Taxes can be filed any time after this date. If you are ready to file now, you can!
- February 22, 2021: Projected date for the IRS.gov Where’s My Refund tool being updated for those claiming EITC and ACTC (also referred to as PATH Act Returns).
- May 17, 2021: Deadline to file for 2020 tax returns.
- October 15, 2021: Deadline for those requesting an extension for 2020 tax returns.
As you wrap up your taxes for the 2020 tax year, keep in mind that working with a tax professional can help you make sense of your unique tax situation. Churchill Mortgage does not give tax advice and we highly recommend you work with a tax specialist for additional guidance.