- IRS tax season 2021: 9 costly mistakes to avoid
- 1. Missing a tax break
- 2. Not filing on time
- 3. Beware of tax scams
- 4. Incorrect bank account numbers
- 5. Name change or wrong address
- 6. Unsigned forms
- 8. Failing to report all of your income
- 9. Math mistakes
- Tax Filing 2021: How to File Taxes & What to Know
- 1. Do you even have to file taxes? (Yes, probably.)
- When can I start filing taxes for 2020?
- Do you file 2020 taxes in 2021?
- 2. Choose how to file taxes
- a. File taxes online with tax software
- b. Hire and work with a tax preparer
- 3. Understand how your taxes are determined
- If you owe
- If you’re getting a refund
- Tax Tips After January 1, 2021
- What Seniors Should Know Before Filing 2020 Taxes
- 2. Penalties are penalties
- 3. There's still a chance to claim missing stimulus checks
- 4. And those stimulus checks aren't taxable
- 5. But your unemployment checks may be taxable
IRS tax season 2021: 9 costly mistakes to avoid
The 2021 tax season is in full swing, but you shouldn’t rush through your returns. Here are 5 mistakes that could cost you. USA TODAY
Tax season is in full swing. And if you’re tempted to rush through your returns, be careful not to make sloppy mistakes or you could miss out on a larger refund, owe more in taxes or face an IRS audit.
Some of the most common errors that filers make include missing a tax break, providing incorrect bank information or accruing penalties for failing to file on time.
If you’re expecting a refund but your basic personal information doesn’t match, it could take a minimum of four to six weeks for the IRS to notify you via mail that you need to respond and correct your mistake.
Tax help? Money help?: We'll tell you how and send money tips, advice delivered right to your inbox. Sign up here
Here are nine common errors that taxpayers should avoid:
Be careful not to make sloppy mistakes when filing your income tax returns because you could miss out on a bigger refund, owe more in taxes or even face an IRS audit. (Photo: Drazen_, Getty Images)
1. Missing a tax break
Tax credits and exemptions are available, particularly for those who were financially affected by the pandemic. The latest COVID-19 economic relief package, signed by President Donald Trump on Dec. 27, created a special break for obtaining the Earned Income Tax Credit, a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children.
But the deal isn’t automatic. Filers and the people who help them with their taxes now must be aware of the new option and take the time to review 2019 earnings, as well as earnings in 2020, to calculate the credit. And they cannot simply assume that they won’t qualify for it.
The payout isn’t immediate. Tax filers who claim the credit face required delays by law even if they file as soon as the tax season starts.
2. Not filing on time
It’s tempting to put off filing your taxes until just before the April 15 deadline, but making a silly mistake may wind up costing you. While filing for an extension will give you more time, you still need to pay any taxes owed by the original deadline.
Even if you can’t pay your full tax bill at the time it’s due, file a return and contact the IRS to start an installment payment plan. Failing to file can result in penalties.
The IRS extended tax season for Texas residents to June 15 due to the recent winter storms.
3. Beware of tax scams
Be wary of unscrupulous individuals who may offer to prepare your taxes but could steal important personal information from you. As part of a hot scheme in 2021, identity thieves are targeting tax professionals by sending an email that appears to be from the IRS. The phony email refers to “IRS Tax E-Filing” and verifying key e-file information.
Paid tax return preparers completed more than half of the tax returns submitted to the IRS in tax year 2018, according to the agency. The Choosing a Tax Professional page on IRS.gov has information about tax return preparer credentials and qualifications.
4. Incorrect bank account numbers
Be sure to double-check the routing and account numbers on your return. Taxpayers who are anticipating a refund should choose direct deposit, which is typically the fastest way to get your money.
5. Name change or wrong address
Did you change your name or move to a new address? If you legally changed your name with the Social Security Administration, make sure it is reflected in your federal and state tax returns. A mismatch may delay the processing of your returns. Any correspondence and even your tax refund may get mailed to the wrong address.
6. Unsigned forms
An unsigned tax return isn’t valid. In most cases, both spouses must sign a joint return. Exceptions may apply to members of the armed forces or other taxpayers who have a valid power of attorney. You can avoid this error by filing your return electronically and digitally signing it before sending it to the IRS.
If you were legally married during the year, don’t forget your filing status may change from Single to Married Filing Jointly or Married Filing Separately. There are other filing statuses that you may not have considered, such as Head of Household or Qualifying Widower, that may yield certain tax benefits.
8. Failing to report all of your income
Individuals often don’t realize they generated income that is subject to tax, including unemployment compensation, rental income, or earnings generated from stock options, dividends and interest. Omitting income from a tax return can result in unpaid taxes subject to interest and various penalties.
A person may be unfamiliar when they receive a new tax form, such as a 1099 or K-1, that includes income to be reported on an individual income tax return. It’s crucial to report your activities from these forms. The IRS generally receives a copy and can determine if any discrepancies exist from their records.
9. Math mistakes
Math errors are among the most common mistakes that filers make. They range from simple addition and subtraction to more complex calculations. Taxpayers should always double-check their math. This is when tax prep software can come in handy since it does the math automatically.
Contributing: Susan Tompor, Detroit Free Press
Those who earned less in 2020 than in previous years should prioritize filing their 2020 taxes ahead of the next stimulus payments. USA TODAY
Read or Share this story: https://www.usatoday.com/story/money/taxes/2021/03/05/irs-tax-season-2021-9-costly-tax-mistakes-avoid/6890573002/
Tax Filing 2021: How to File Taxes & What to Know
Tax filing can be daunting. So if you’re wondering how to file taxes online or on paper in 2021, here’s a cheat sheet on how to do your taxes and how to make tax filing easier.
1. Do you even have to file taxes? (Yes, probably.)
Even if you don’t have to file taxes, you might want to do it anyway: You might qualify for a tax break that could generate a refund. So give tax filing some serious consideration if:
When can I start filing taxes for 2020?
The IRS set the start of tax season as Feb. 12, 2021. That's the date it starts processing returns for the 2020 tax year.
Do you file 2020 taxes in 2021?
Yes. The purpose of the 2021 tax-filing season is to file taxes for the 2020 tax year.
2. Choose how to file taxes
There are three main ways to file taxes: fill out IRS Form 1040 or Form 1040-SR by hand and mail it (not recommended), use tax software and file taxes online, or hire a human tax preparer to do the work of tax filing.
a. File taxes online with tax software
If you’ve used tax software in the past, you already know how to prepare and file taxes online. Many major tax software providers offer access to human preparers, too.
TurboTax, H&R Block, TaxAct and TaxSlayer, for example, all offer software packages or support options that come with on-demand, on-screen or online access to human tax pros who can answer questions, review your return and even file taxes online for you.
|Pricing:$60 to $120, plus state costs.|
|Pricing: $44.95 to $79.95, plus state costs.Promotion Get 25% off federal and state filing costs.|
|Pricing:$49.99 to $109.99, plus state costs.|
» MORE: See our picks for the year's best tax filing software
b. Hire and work with a tax preparer
While it's never been easier to do your own taxes using software, as your financial life gets more complex you might wonder if you're missing something and should get someone to prepare and help file your taxes. If you have a business or a healthy side gig, or you just want help understanding all of the forms, you might seek out a professional's guidance.
If you don't want to meet in person with a tax preparer, there’s a way to file taxes without leaving the house. A secure portal lets you share documents electronically with a tax preparer. Typically, the preparer will email you a link to the portal, you’ll set up a password and then you can upload pictures or PDFs of your tax documents.
3. Understand how your taxes are determined
The government decides how much tax you owe by dividing your taxable income into chunks — also known as tax brackets — and each chunk gets taxed at the corresponding tax rate. The beauty of this is that no matter which bracket you’re in, you won’t pay that tax rate on your entire income.
The progressive tax system in the United States means that people with higher taxable incomes are subject to higher federal income tax rates, and people with lower taxable incomes are subject to lower federal income tax rates.
» MORE: Make sure you're not overlooking any of these 20 popular tax breaks
You’ll need to do this whether you’re hiring a tax preparer or doing the tax filing yourself. The goal is to gather proof of income, expenses that might be tax-deductible or win you a tax credit, and evidence of taxes you already paid throughout the year. Our tax prep checklist has more guidance, but here’s a short version of what to round up:
- Social Security numbers for yourself, as well as for your spouse and dependents, if any.
- W-2 form, which tells how much you earned in the past year and how much you already paid in taxes. (If you had more than one job, you might have more than one W-2.)
- 1099 forms, which are a record that some entity or person — not your employer — gave or paid you money.
- Retirement account contributions.
- Property taxes and mortgage interest.
- State and local taxes you paid.
- Unreimbursed medical bills.
- Last year’s federal and state tax returns.
If you owe
- There are plenty of ways to send money to the IRS. Electronic payments, wire transfers, debit and credit cards, checks and even cash are among your options. (Here's an overview of them.)
- If you can’t pay your taxes all at once, an option might be an IRS payment plan, which is an agreement you make directly with the agency to pay your federal tax bill over a certain amount of time. There are two kinds of IRS payment plans: short-term and long-term. Either way, typically you’ll make monthly payments to settle what you owe.
If you’re getting a refund
There are a few things you can do to make sure your money hits your bank account as quickly as possible:
Avoid filing your tax return on paper. The IRS typically takes six to eight weeks to process paper returns. When you file taxes online, on the other hand, your return should be processed in about three weeks. State tax filing authorities also accept electronic tax returns, which means you may be able to get your state tax refund faster, too.
Have your refund sent by direct deposit. When you file taxes you can have the IRS deposit your refund directly into your bank account instead of sending a paper check. That cuts the time in waiting for the mail.
Track your refund. You can track the status of your IRS refund and your state refund online.
Tax Tips After January 1, 2021
Updated for Tax Year 2020
Your tax bill isn't chiseled in stone at the end of the year. Here are 10 tax tips and steps you can take after January 1 to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
If you think your tax bill is chiseled in stone at the end of the year, think again.
Though it’s true that most money-saving options to defer income or accelerate deductions become much more limited after December 31, there is still a lot you can do to make the tax-filing season cheaper and easier.
Here are 10 tax tips for the new year to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.
If you haven’t already funded your retirement account for 2020, you have until the tax return filing due date to do so. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.
- If you have a Keogh or SEP and you get a filing extension to October 15, 2021, you can wait until then to put 2020 contributions into those accounts.
- To start tax-free compounding as quickly as possible, however, don’t dawdle in making contributions.
Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred. It’s hard to find a better deal.
- If you put away $5,000 a year for 20 years in an investment with an average annual 8% return, your $100,000 in contributions will grow to $247,000.
- The same investment in a taxable account would grow to only about $194,000 if you’re in the 25% federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
To qualify for the full annual IRA deduction in 2020, you must:
- not be eligible to participate in a company retirement plan, or
- if you are eligible, you must have adjusted gross income of $65,000 or less for singles, or $104,000 or less for married couples filing jointly.
- If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $196,000.
For 2020, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2020 is $57,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2020 tax bill—Roth contributions are not deductible—it could be the better choice because all withdrawals from a Roth can be tax-free in retirement.
- Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2020) to a Roth IRA, you must earn $124,000 or less a year if you are single or $196,000 if you’re married and file a joint return.
The amount you save for making a contribution will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $6,000, you will save $1,500 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.
If you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. Plus, you might owe significant interest and penalties, too.
- According to IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty.
- If your adjusted gross income for 2019 was more than $150,000, you have to pay more than 110% of your 2019 tax liability to be protected from a tax year 2020 underpayment penalty.
If you make an estimated payment by January 15, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then.
But, if your income windfall arrived after August 31, 2020, you can file Form 2210: Underpayment of Estimated Tax to annualize your estimated tax liability, and possibly reduce any extra charges.
A note of caution: Try not to pay too much. It’s better to owe the government a little rather than to expect a refund. Remember, the IRS doesn’t give you a dime of interest when it borrows your money.
Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on.
How do you get started?
- Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return.
- Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important.
- Collect receipts and information that you have piled up during the year.
- Group similar documents together, putting them in different file folders if there are enough papers.
- Make sure you know the price you paid for any stocks or funds you have sold. If you don’t, call your broker before you start to prepare your tax return.
- Know the details on income from rental properties. Don’t assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files.
You won’t find all of them at the post office and library. Instead, you can go right to the source online.
- View and download a large catalog of forms and publications at the Internal Revenue Service website or have them sent to you by mail.
- You can search for documents as far back as 1980 by number or by date.
- The IRS also will direct you to sites where you can pick up state forms and publications.
By the way, TurboTax already includes all the tax forms you need, which takes the hassle deciding which forms to use. Just answer simple, plain-English questions, and TurboTax fills out all the right forms for you.
It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.
- Itemizing is worth it when your qualified expenses add up to more than the 2020 standard deduction of $12,400 for most singles and $24,800 for most married couples filing jointly.
- Many deductions are well known, such as those for mortgage interest and charitable donations.
- You can also deduct the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2020.
The eligibility rules for claiming a home office deduction have been loosened to allow more self-employed filers to claim this break. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there.
- As always, you must use the space exclusively for business.
- Many taxpayers have avoided the home office tax deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem.
- You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is the square footage of the office to the total area of the house.
- A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.
One home office trap that used to scare away some taxpayers has been eliminated.
- In the past, if you used 10% of your home for a home office, for example, 10% of the profit when you sold did not qualify as tax-free under the rules that let homeowners treat up to $250,000 of profit as tax-free income ($500,000 for married couples filing joint returns).
- Since 10% of the house was an office instead of a home, the IRS said, 10% of the profit wasn’t tax-free. But the government has had a change of heart. No longer does a home office put the kibosh on tax-free profit.
- You do have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25%. (Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.)
Be sure to plug in Taxpayer Identification Numbers (usually Social Security Numbers) for your children and other dependents on your return. Otherwise, the IRS will deny any dependent credits that you might be due, such as the Child Tax Credit.
- Be especially careful if you are divorced. Only one of you can claim your children as dependents, and the IRS has been checking closely lately to make sure spouses aren’t both using their children as a deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, it’s highly ly that the processing of your return (and any refund you’re expecting) will come to a screeching halt while the IRS contacts you to straighten things out.
- After you have a baby, be sure to file for your child's Social Security card right away so you have the number ready at tax time. Many hospitals will do this automatically for you.
- If you don’t have the number you need by the tax filing deadline, the IRS says you should file for an extension rather than sending in a return without a required Social Security number.
If you can’t finish your return on time, make sure you file Form 4868 by May 17, 2021. Form 4868 gives you an extension of the filing deadline until October 15, 2021.
On the form, you need to make a reasonable estimate of your tax liability for 2020 and pay any balance due with your request.
Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS.
- If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5% per month of the tax owed and a late-payment penalty of 0.5% a month of the tax due.
- The maximum late filing penalty is 22.5% and the late-payment penalty tops out at 25%.
- By filing Form 4868, you stop the clock running on the costly late-filing penalty.
Electronic filing works best if you expect a tax refund. Because the IRS processes electronic returns faster than paper ones, you can expect to get your refund three to six weeks earlier. If you have your refund deposited directly into your bank account or IRA, the waiting time is even less.
There are other advantages to e-filing besides a fast refund:
- The IRS checks your return to make sure that it is complete, which increases your chances of filing an accurate return. Less than 1% of electronic returns have errors, compared with 20% of paper returns.
- The IRS also acknowledges that it received your return, a courtesy you don’t get even if you send your paper return by certified mail. That helps you protect yourself from the interest and penalties that accrue if your paper return gets lost.
If you owe money, you can file electronically and then wait until the federal tax filing deadline to send in a check along with Form 1040-V. You may be able to pay with a credit card or through a direct debit.
- With a credit card, expect to pay a service charge of as much as 2.5%.
- With direct debit, you may delay the debiting of your bank account until the actual filing deadline.
Plus, federal e-filing is now included at no additional charge with all TurboTax federal products.
TurboTax can handle the most complex returns with ease (and allow you to file your taxes electronically for a faster refund). You just need to answer simple questions, such as whether you've had a baby, bought a home or had some other life-changing event in the past year. TurboTax will then fill out all the right forms for you.
If you are concerned about preparing your own return, TurboTax offers some additional services that you can purchase when preparing your return that will give you added confidence and peace of mind. For example, you can talk to a tax professional to get your questions answered, or purchase Audit Defense coverage so that you are professionally represented in the event of an audit.
- Estimate your tax refund and where you standGet started
See if you qualify for a third stimulus check and how much you can expect
Easily calculate your tax rate to make smart financial decisions
Estimate your self-employment tax and eliminate any surprises
Know what dependents credits and deductions you can claim
See how much your charitable donations can get the most of what you’re giving
Know what tax documents you'll need upfront
Learn what education credits and deductions you qualify for and claim them on your tax return
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
What Seniors Should Know Before Filing 2020 Taxes
Death and taxes may be the two certainties in life, but at least you know when the taxman will come knocking. Federal income tax returns are due May 17 this year, not the traditional April 15 filing deadline.
The Internal Revenue Service (IRS) extended the deadline because of the enormous backlog caused by the COVID-19 outbreak and the most recent stimulus bill, whose payments started rolling out shortly after the IRS began processing 2020 tax returns.
The IRS set Feb. 12 as the start date for processing 2020 returns, which is later than normal. It was Jan. 27 last year. The IRS says it needed the extra time to reprogram systems due to the tax law changes on Dec. 27 that authorized a second round of stimulus payments.
Are you a procrastinator? Any taxpayer can get an automatic filing extension to Oct. 15 by submitting Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
” However, you still must pay the amount of tax you owe by May 17 or face interest and penalties.
Soldiers in combat zones and people living in disaster areas typically get an extension on both filing and paying federal income taxes.
2. Penalties are penalties
Another certainty: If you're required to file a federal tax return but don't, you'll pay.
If you file after May 17 without having asked for an extension, you'll have to pay a late filing fee, which is 5 percent of the taxes you owe for each month, or part of a month, that a tax return is late.
That penalty starts accruing the day after the tax filing due date and can build up to a maximum of 25 percent of your unpaid taxes.
The IRS also levies a late payment penalty, which is 0.5 percent of your unpaid taxes each month. (That's 6 percent annually.) If you blow the filing deadline and the payment deadline, however, the maximum monthly penalty is 5 percent of your unpaid taxes. Un the late filing penalty, the late payment fee keeps accruing until you pay your taxes.
You can pay your taxes by credit card if you don't have the money you owe on hand. But be warned that you'll be charged a processing fee. You can also ask the IRS for a payment plan via this online tool.
3. There's still a chance to claim missing stimulus checks
If you didn't get a stimulus check last year — or if you didn't get as much as you were entitled to — you can claim the missing stimulus money on your 2020 tax return in the form of a tax credit called the Recovery Rebate Credit. (The stimulus payments were, technically, an advance on this tax credit.) A tax credit reduces your taxes, dollar for dollar — and in this case, it can not only reduce your taxes to zero but produce a refund.
Here's an example: A family of four who met the eligibility requirements was entitled to a total of $5,800 in the two rounds of stimulus checks.
If the family had overpaid their taxes by $200, they normally would have expected a $200 refund.
But if the family never received the stimulus payments owed to them, they could recover the money with their 2020 tax return for a $6,000 refund — the $200 in overpaid taxes plus the $5,800 worth of missing stimulus payments.
Use the Recovery Rebate Credit Worksheet that comes with your federal tax return to figure how much of a credit, if any, you're eligible for. The 21-line worksheet looks intimidating, but it's worth the effort if you're missing money. No itemization is required. The amount from the worksheet goes on line 30 of your 1040 form.
4. And those stimulus checks aren't taxable
According to the IRS, stimulus payments are not considered income and no tax is owed on the money. Stimulus payments are also not considered income for purposes of determining eligibility for federal benefits or assistance programs.
5. But your unemployment checks may be taxable
Unemployment benefits were a lifeline for many who lost their jobs last year during the pandemic.
Unfortunately, those jobless benefits are taxable — but fortunately, up to $10,200 of 2020 unemployment benefits is exempt from federal income tax for households with an adjusted gross income under $150,000. Married couples who got unemployment payments can each exclude $10,200 of unemployment benefits.
When you signed up for unemployment benefits, you had the option to have taxes withheld. Whether you did or not, you'll receive a Form 1099-G, “Certain Government Payments,” which will show the amount of unemployment benefits you received in 2020 and how much, if anything, was withheld for taxes. Any severance pay you received last year is also taxable.
Depending on your income and the number of dependents you have, you may be eligible for the Earned Income Tax Credit (EITC), which could reduce the taxes you owe, dollar for dollar, by as much as $6,660.
the Recovery Rebate Credit, the EITC is a refundable credit, which means that you’ll get the full amount of the credit you’re eligible for, even if you had no income and even if it results in a refund.