It is hard to believe that we are a full quarter of the way into 2021. While most people have 2020 in their rearview, there is one more thing we need to do before we can officially move on – file our taxes. While for most people taxes may not be the most exciting thing in the world, my hope is that, at the end of this blog, you will have learned something new for this tax-filing season.
Before we get started, it is important to note that the federal tax-filing deadline has been extended until May 17, 2021, for individual taxpayers. This relief does not apply to first-quarter estimated tax payments for 2021 – which are still due on April 15th. The IRS plans to provide more guidance on this extension soon.
In addition to the federal deadline, Virginia has also extended the tax-filing deadline for state income tax returns to May 17, 2021. However, for tax filers who end up owing payment, it is possible that they may owe interest on any amount due that is paid after May 1st. Legislation to waive those fees will be considered in the legislative session in April, according to a news release.
As the tax filing deadline quickly approaches, there are several things to consider when closing out 2020:
1. Consider contributing to your retirement account.
- How much? You can contribute to your traditional IRA or your Roth IRA up to the tax filing deadline. Specifically, you can contribute $6,000 (plus a $1,000 catch-up contribution if you are 50 years old or older). This is an aggregate number, meaning your total contributions to all of your individual retirement accounts (both traditional and Roth IRAs) can only add up to $6,000 (or $7,000 if 50 years old or older).
- Traditional or Roth? Making a deductible contribution to a traditional IRA will not only lower your taxable income for the year but will also allow for tax-deferred compounding until the funds are withdrawn in retirement. Another useful strategy, especially in your early accumulation years, is to contribute to a Roth IRA. While this will not lower your current tax bill, it allows for tax-free growth for your future withdrawals. Deciding between the two depends on your specific tax situation.
- Do I qualify? Before contributing to a traditional IRA as a tax planning strategy, make sure you qualify for the deduction. Qualifications for deducting traditional IRA contributions are based on several things: whether you had earned income in 2020, whether you were eligible to participate in a company retirement plan, as well as your tax filing status and your modified adjusted gross income (MAGI). Roth IRAs have contribution limits that should be reviewed depending on your modified adjusted gross income (MAGI).
2. Gather all necessary forms and documents needed to file your taxes.
- What forms? Below is a list of forms you may need when filing your taxes for 2020 and the deadline for when they should be available to you:
- The following forms should be available to you by Jan. 31st:
- W-2, Wage and Tax Statement
- 1098, Mortgage Interest Statement
- 1098-E, Student Loan Interest Statement
- 1098-T, Tuition Statement
- 1099-G, Certain Government Payments (e.g., state tax refunds, unemployment compensation)
- 1099-DIV, Dividends and Distributions
- 1099-INT, Interest Income
- 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- The last form we want to highlight is the Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., which should be available by March 15th.
- The following forms should be available to you by Jan. 31st:
- Keep track! Make sure that you compile these forms and organize them in a way that makes sense to you as well as any tax preparation service you may be using.
- Anything else? Please note that you will not need Form 5498, IRA Contributions Information, to file your taxes. The custodian for your IRA (i.e., Schwab) will send it to you as well as the IRS by May 31st for your records.
3. To Itemize or not to Itemize?
- A brief overview. Once you calculate your adjusted gross income (AGI), you can decide to either take the standard deduction or itemize your deductions. The Tax Cuts and Jobs Act of 2017 significantly increased the standard deduction amount (limits were increased to $12,400 for single and MFS, $24,800 for MFJ, adjusted for 2020). This caused fewer people to itemize their deductions for things such as unreimbursed medical and dental expenses that exceed 7.5% of your AGI, interest you paid, taxes paid up to the $10,000 limit (including personal property taxes and state and local taxes), and charitable donations with certain limitations, depending on what you gift and the type of charitable organization you gift to.
- So what? Choosing whether to take the standard deduction or to itemize deductions can be as easy as adding up your itemized deductions and picking the larger number. However, the most important part of this process is organization. Make sure to keep track of your charitable gifts and the forms you receive, such as your Mortgage Interest Statement (Form 1098).
4. There are certain tax-related items to consider, specific to tax-year 2020.
- What’s so different? Last year was a blur for some people, myself included, so here’s a list of tax-related items that may impact you. *
- Unemployment benefits are taxable. Many people in the United States filed for unemployment benefits last year, some for the first time. If you are one of these people, you should receive Form 1099-G, which will show the full taxable amount as well as any amounts that were withheld. Keep in mind, the new American Rescue Plan Act has provided a new exclusion of up to $10,200 of unemployment compensation, with income limitations.
- Gig economy work is taxable. What’s gig economy work? Well, if you ever delivered food to anyone last year as a DoorDash or GrubHub driver, listen up. Make sure to gather the information needed regarding your earned income for tax-filing purposes.
- If you made a charitable contribution of cash to an eligible charity last year, you may be able to deduct up to $300 without having to itemize your deductions.
- Beginning in tax-year 2020, there is no age limit on who can contribute to their IRA. Both the modified adjusted gross income (MAGI) limits and contribution limits still apply.
- Economic Impact Payments (“stimulus checks”) are not taxable income.
*This information was taken directly from the IRS website (https://www.irs.gov/newsroom/be-tax-ready-understand-how-life-changes-may-affect-the-2020-tax-return-filed-this-year)
- Looking for more information on the American Rescue Plan Act? Click here to read our blog on the new $1.9 trillion stimulus package and its potential impact on individual tax filers.
5. File and pay your taxes as soon as possible.
- Why? Now is the time to file your taxes. Just because the filing deadline has been pushed back does not mean you have to wait! For those of you who cannot file your return by May 17, 2021, be sure to file Form 4868 for a 6-month extension.
- Are there any possible penalties? Yes. The penalty for filing late is 5% each month you delay, whereas the penalty for late payment is 0.5% per month you wait. Takeaway: If you cannot afford to pay your taxes now, file anyway. The penalty will be a lot less.
6. Tull Financial Group is here to help.
- How? We have a team of experienced advisors ready to help guide you through your tax planning needs under financial planning services.
- Need help filing your taxes? If you need assistance, we can recommend a tax preparer, just give us a call at (757) 436-1122 or fill your details here.
Please reach out to our office if you have any questions about the information above. Also, keep an eye out for our upcoming tax-related blogs that will help better equip you for the next tax-filing season.