February marks the official start of tax season and while taxes have always been a source of confusion for many, this year comes with its own unique set of challenges. The covid-19 global financial crisis was an unprecedented year for many when it comes to their financial standing and as such, the way taxes should be filed has changed.
From stimulus pay to donations, changes to income, or a loss of it altogether, chances are you have some questions around how to best file your taxes in 2021. While there is no replacing the advice you’ll get from speaking with an experienced tax accountant, we compiled an overview of some of the biggest changes.
This might be the biggest unknown heading into the 2021 tax season. Do I owe taxes on stimulus checks? Will they affect the amount I get as a return?
The answer is no, the IRS does not consider stimulus payment as income so you won’t include it in your taxable income on your 2020 Federal income tax return and you won’t pay income tax on those payments. Because of this, it will not reduce your refund or increase the amount you owe.
Just because it’s not included doesn’t mean no action is required, however. You will need to make sure you have the IRS Notice 1444 from the first stimulus check and Notice 1444-B from the second – including them both in your tax return.
Sadly, this is probably the second biggest change to tax filing people are struggling with. The US lost 20.6 million jobs between March and April 2020, creating an unemployment rate of 14.7% which is a level that we have not seen since the Great Depression in the 1930s and, the number of lost jobs is double what we experienced during 2007-2009 recession (8.7 million American jobs lost).
If you collected unemployment benefits in 2020, they do differ from stimulus checks in that any compensation you received as part of unemployment benefits is considered taxable income – viewed the same exact way as money you would receive in a paycheck.
When you signed up for benefits, you would’ve had the option to have a percentage deducted from your cheques (similar to the taxes employers withhold from a paycheck) or, if you chose not to do this, you might’ve set a percentage aside yourself for future taxes. If you did neither, as again unemployment benefits are viewed as taxable income, you could face a tax bill.
One way to help with this is to ensure a generous payout from the earned income credit which could offset some of the taxes you owe and even contribute to a higher refund. The way to do this is to file your taxes as soon as you can take advantage of the one-time lookback provision which allows tax filers to choose whether they use their 2019 or 2020 earned income to calculate their Earned Income Tax Credit on their 2020 return.
If you were one of the lucky few who was in the financial position to make donations to food banks or other charities during the pandemic how those donations are filed has changed as well. Your first step though, if you made donations to organizations that were new to you, is to make sure they are tax-exempt as defined by section 501(c)(3) of the Internal Revenue Code. Some that qualify are the Red Cross, museums, non-profit education agencies, volunteer fire departments, and so on. It is prudent to check this as some organizations can be non-profit without 501(c)(3) status, complicating things for you when it gets to tax time. Thankfully you can verify an organization’s status using the IRS Exempt Organizations Select Check tool.
The nice change you should make note of is whether or not you have to itemize your donations on your tax return. Previously in order to claim tax-deductible donations, you had to itemize by filing Schedule A of IRS Form 1040 or 1040-SR. Likely because 2020 saw more donations of smaller amounts, this is the only year you can deduct up to $300 of cash donations per tax return without having to itemize, referring to as an “above the line” deduction.
To encourage even more donations in 2021, the deduction amount is going to rise to $300 per person rather than per tax return which means if you jointly file within a marriage you could deduct $600 worth of cash deductions without having to itemize.
Another important change is that previously you could only write off up to 60% of AGI or adjusted gross income (your total income minus other deductions you’ve already taken). To promote giving and hopefully stoke the fires of generosity for those in the financial position to donate, the CARES Act now allows you to deduct up to 100% of your AGI.
If these changes gave you more questions than answers when it comes to filing your taxes in 2021, feel free to reach out to us to ensure you have all the information you need so the financial headache that was 2020 doesn’t spill over into your 2021.