Happy New Year! Oh, sorry. Was I typing too loud?
I'm glad you were able to festively, and I hope safely, ring in 2021. Now that it's here, it also brings a new tax filing season.
So if the IRS can be ready, so can we. So here are a few tax things to think about and take care of, after, of course, you're fully recovered from last night's fireworks and toasts.
1. Hire a tax pro: Tax professionals are still earning their 2020 money, what with last year's coronavirus pandemic prompted tax law changes still being sorted out and tweaked by year-end legislation. Those Internal Revenue Code alterations are exactly why you could need tax help in 2021 more than ever before.
Sure, you can spend your time on the internet reading the ol' blog (thank you!) and other tax publications. But in most cases, those of us who write about taxes do so in generalities to reach the widest possible audience.
Basically, we're trying to give you an idea of tax situations that you can adapt to your personal situations. And that you can talk with your tax pro about to ensure the moves actually are best for you.
That personalization is one of the key reasons to see professional filing help. Unless your financial and tax situation is pretty basic, you'll need some help sorting out whether a particular tax break applies. And with all the COVID upheaval to so many lives last year, few of us living a basic, simple tax world.
So consider getting professional tax help. And do so soon.
As I mentioned, most tax pros are still working on cleaning up their existing clients' tax situations and getting ready to start on their 2020 returns. You want to be part of that group before the Certified Public Accountant, Enrolled Agent or other tax pro of your choosing — the IRS also has an online credential tax preparer search tool — fills up her or his schedule.
2. Get organized: Regardless of whether you work with a tax professional or do your taxes on your own, generally using tax software, you'll need all your tax material. This includes tax a variety of tax documents — W-2s, 1099s, donation receipts, year-end account statements — that will soon be on their way to your email or snail mail box.
But there's other material that you need to dig out yourself. If you turned to gig jobs when pandemic precautions cut back on your salaried job hours or started your own business because you lost your job, find all the records you kept related to that. This includes such things as mileage records for business use of your car and home office-related expenses for your new solopreneur endeavor. (Sorry, if you worked from home but were doing so as part of your existing employment for someone else, that home office likely won't be deductible.).
And if you itemize, one of the reasons for still messing with Schedule A probably is lots of medical expenses. The good news is that those costs still just have to exceed 7.5 percent of your adjusted gross income (permanently now thanks to the Consolidated Appropriations Act, 2021 (CAA) that became law on Dec. 27, 2020). Gather all those doctor, dentist and hospital bills, prescription co-pays and even your healthcare related mileage records. They could help you make it over the itemized deduction AGI percentage hurdle.
Now set up a system to collect all this data, whether you already have it in hand or it arrives in the coming weeks.
If you go electronic, put digital copies into a special folder on your computer. That way they'll be easily accessibly if you do your taxes on your own. If you use a tax pro, you and easily can email him or her your tax info or copy it onto a thumb drive to take when you when you meet — still wearing masks and safely distanced — face-to-face.
If you're old school and still rely on paper (no judging!), your collection system can be as simple as an accordion folder, with documents dropped into the appropriate slots. Or you can use separate folders and/or envelopes to hold the material in a filing cabinet drawer.
The key is just to get all the tax-related items you'll need into one place so that when you do start filling out your 1040, you have all the information you or your tax pro need.
3. Pay your estimated and extended taxes: One of the most fun tax things about January is that while the month kicks off the start of a new tax year, it also wraps up the previous one for folks who pay estimated taxes.
The table below shows the official due dates of these four extra payments.
For income received in
Jan. 1 through March 31
April 1 through May 31
June 1 through Aug. 31
Jan. 15 of next year
Sept. 1 through Dec. 31
*If the 15th is on weekend or federal holiday, the estimated payment is due the next business day.
And you can skip this final payment if you're sure you'll get your 2020 tax return filed and will pay any due taxes by Jan. 31, or this year by Feb. 1.
The first of February option in 2021 is because the option to skip the 1/15 fourth estimated tax deadline by filing by 1/31 follows the same weekend or federal holiday footnote shown in the estimated tax table above. Since the end of January this year is on Sunday, the due date slides to the next business day.
Good intentions don't count here. If you miss the Jan. 15 estimated tax payment do not miss the Feb. 1 deadline to file your full 2020 Form 1040. If you do, Uncle Sam will hit you with penalties for not paying your estimated taxes on time.
Pay Your Extended 2019 Extension
COVID-19 wasn't the only horrid event in 2020. Many areas of the United States also sustained major damages due to natural disasters. Some of these destructive fits by Mother Nature in 2020 hit near 2019 tax-year filing deadlines.
In three end-of-year instances where taxpayers already had extended their 2019 return deadline to Oct. 15, 2020, the IRS allowed affected filers until Jan. 15, 2021, to finish that task. They are taxpayers affected by wildfires in parts of California and Oregon and those residents in parts of Alabama where Hurricane Sally did major damage.
Taxpayers affected by natural disasters can find more in IRS Publication 547, the IRS' special web page Tax Relief in Disaster Situations (click on the 2020 link for that year's disaster/tax news) and, shameless plug alert, the ol' blog's special Storm Warnings collection.
4. Adjust your withholding: Many people came to appreciate the value of an emergency savings account when the coronavirus pandemic swept across the country or a natural disaster hit their areas. Unfortunately, many others didn't have enough or any savings.
And others, instead of opening a savings account at a bank or credit union, choose to use the Federal Bank of Uncle Sam. They intentionally overwithhold income taxes from their paychecks so they'll get a big refund when they file their returns the next year.
I get it. Saving is hard, especially when you have so many expenses. And if you don't ever get the money because it's automatically going to the IRS, you won't be tempted to spend it.
But when you need that cash, you can't get it from the tax agency like you can from a bank. You have to wait until the next year, which could be 11+ months away if something terrible happens, to file and then hope the IRS processes your return and sends your refund quickly.
Instead of locking up your funds and earning absolutely no interest on them, this year consider changing your withholding so that you only pay in what you will owe. The extra pay you'll get can go into a more accessible savings account. You even can set up a direct system with your bank or other financial institution so that, as with your withholding, you don't get the cash; it goes from your paycheck to your emergency account.
Use the IRS' online tax withholding estimator to figure your proper withholding amount. Then give your payroll office a corrected Form W-4. The sooner you do it, the more your savings account will grow and be available any time you really need to use that money.
More tax moves to make: These four tax suggestions are just a few of the things to think about this first month of this brand-spanking-new New Year. You can find more in the January Tax Moves over in the ol' blog's right column.
They're listed just below the countdown clock that's keeping track of how long until this year's filing deadline, which for now is still April 15. We'll see if continuing COVID-19 issues push it into a later month like last year.
For now, though, we're focused on January. So peruse this month's tax moves at your own pace based on how hard you partied on New Year's Eve, your personal recovery ability and how eager you are to get started on your 2020 taxes.
Happy New Tax Year!
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