You're expecting a refund, so you're planning to file your tax return soon.
Wait. You might want to take a step or two back.
First, you need to make sure you have all the information you need to properly fill out your 2021 Form 1040. You can get an idea of that material in my post examining some common tax statements you need to complete your filing.
Second, you need more than paperwork. You need to take a good look at your personal situation and answer some questions. The responses could affect your filing.
This checklist can help.
Start with last year: Pull out your 2020 tax return. Your tax life back then might have been different because of the effects of the COVID-19 pandemic, but it's still a good place to start.
You'll also want to dig out that copy of last year's state tax filing if you live in a state that collects an income tax.
Even if there have been some changes in your life, your old filings are good templates. They show your income sources — wages, any self-employment gigs (or full-time work), investment earnings — and what tax deductions and credits you were able to claim back then.
Again, some of this info will be in the aforementioned tax statements you'll get by the end of this month. But your previous returns could help you ensue you get all of them this.
Plus, these documents will have some data — for example, Social Security numbers (yours, your spouse's and any dependents' identification digits) and bank account info if you want your refund directly deposited — that you'll need again this year.
Getting to know the tax you: OK, you have the paperwork, statements and official tax forms or IRS-approved substitutes.
But don't, however, start working on your taxes just yet. Even if you think you have everything, think again.
You also need to take a look at your life last year and answer a few questions that could have tax implications.
Since every filer's tax situation is unique, some of these might not apply. But you might be surprised, so give them all a look.
Did you have untaxed income? This includes things like contract work or prize winnings. Depending on how much it is, you might have made estimated tax payments to both Uncle Sam and your state tax collector. Dig out (or reconstruct) those estimated tax records.
Do you get tips in connection with your work? You should have been keeping records of the gratuity amounts, especially if you've had to report them each month (as noted in the ol' blog's tax moves column there to the right) to your employer.
Did you get unemployment benefits? The associated Form 1099-G you should get (and discussed in the previously mentioned tax statement post) will detail unemployment benefits paid after you were laid off due to your company's coronavirus closure. But since many folks don't realize that unemployment benefits are taxable, it's worth a second reminder here.
Did you move last year? Sorry, you probably aren't going to be able to count on Uncle Sam to help cover your relocation costs. This above-the-line deduction is still around, but tax reform made the tax break available only to members of the Armed Forces. Still, you need to be sure that all your expected documents are coming to your new address. Also, if you were a resident of or had income from an employer in another state, it could mean added tax filing with those other tax jurisdictions.
Did you work from home during the pandemic? You lack of commuting was nice, but if it was in a different locale than your employer, as noted in the moving query above, it could complicate your taxes. And no, you probably won't be able to claim the home office deduction.
Did you start your own business? If your pandemic job loss or general self-reflection prompted you to go into business for yourself, you might be able to claim the home office tax break. Make sure you maximize it. Also do your entrepreneurial homework, especially when it comes to business entity choices and hiring employees.
Did you close your business? If COVID did a number on your company and you had to shut it down, make sure you didn't overlook any of the tax tasks tied to business closures.
Did you retire? You made it! No more 9-to-5. But now you're financing your lifestyle with distributions from your retirement accounts. Depending on the type of plan you have, that money could be taxable. Double check income statements for your workplace retirement and/or IRA withdrawals. Do the same with your Social Security benefits, some of which also could be taxed. Note, too, that some states tax pension payouts.
Are you still contributing to your retirement plan? Some or all of it might be deductible. Your accounts' annual and tax statements will help you decide. Don't forget about nest egg plans you've set up if you're self-employed, whether as your full-time work or as gig work. These contributions also can be used to reduce your tax bill, so have those statements handy, too. And don't overlook the tax benefits of the Saver's Credit if you qualify.
Did you tie the knot? Exchanging vows with your soulmate, even on the last day of the year, means a difference in your personal and tax life. Among the tax to-do's to take care of after you say "I do" is determining your new married filing status, either jointly or separately.
Did you and your spouse split last year? When your divorce was official could affect your taxes. For divorces and separation agreements finalized in 2019 or later, alimony payments are not deductible for the payer or counted as taxable income to the recipient. However, if your divorce was finalized in 2018 or earlier, you're grandfathered into the old system: alimony is still deductible, again as an above-the-line deduction, to the payer and still counts as income to the ex-spouse getting the payments. Have the paperwork showing the year of your marital split and, as long as they haven't made any modifications to that prior dissolution agreement, the amount paid/received for tax deduction/payment purposes.
Has your family changed? Whether your brood got larger or smaller could affect how you file, as well as some tax breaks. A new baby is another dependent. If that child was adopted, there are tax breaks for that process.
If you answered yes to the previous marital split question, then double check your filing status. Yes, just like getting married, dissolving matrimonial bonds means changes at tax time. You no long will be filing jointly, but you might not be filing as a single taxpayer either if you have children and you are the custodial parent. You likely will be head of household.
Other family related tax questions include —
- Did you pay for a dependent child's (or another dependent's) care so you could go to work?
- Did you receive any assistance from your employer to pay for education expenses, child care costs or adoption expenses? If you're covering your child care expenses on your own, the 2021 tax break has been enhanced.
- Did you hire a nanny or other household help? That household help is great, but it also could mean more tax duties for you, the employer.
- Speaking of educational costs, did you pay a student's tuition or take out a loan to keep yourself or your student in class? You might be able to claim the Lifetime Learning Credit or deduct some of interest paid on the college loan.
- Are you supporting older family members? It could your children who graduated college but are struggling to find their footing in this economy. Or it could be your aging parents. Depending on how much and the living arrangements, you might qualify for a tax break, like the tax credit for other dependents.
Did your housing situation change without making a move? There are tax considerations if you made improvements to your home? The same is true if you sold, refinanced or faced any foreclosure transactions on your personal residence. And if you own a second residence or any other real estate and you rented it out, the length of those rental periods could affect your tax bill.
Did you have money in a foreign account? Did you report it to Uncle Sam and do so on time?
Did you have any nonresidential debt that was canceled? It generally is counted as taxable income.
Did you have health care coverage? Did you buy your medical insurance through the marketplace, either the federal one or your state's marketplace? You might qualify for the Premium Tax Credit.
Did you serve in the military? If so, did you receive combat pay? It could affect your claiming of the Earned Income Tax Credit (EITC). Your posting as a member of the armed forces also could affect your filing due date.
Do you qualify for the EITC? Speaking of the EITC, did your earnings drop because of COVID-19 job cuts? You might be able to get more from this refundable tax credit by using your pre-pandemic 2019 earnings amounts to claim it on your 2021 return. And the tax law change that makes this option possible also enhanced the EITC for taxpayers who don't have children.
How old are you? I know, it's not a polite question, but it's an unavoidable passage. Aging also could affect your taxes. Many older taxpayers don't realize there are several tax breaks they can claim. They range from larger standard deduction amounts to added contributions to retirement accounts to filing the special Form 1040-SR.
Can you read this post without any trouble? Regardless of your age, a visual impairment could net you a larger standard tax deduction.
Taxes truly are personal: I really didn't mean to pry, but the tax fact is that that there's really never too much information to take into account when it comes to filling out your annual return. Or planning for next year's taxes, but that's another post.
So make sure you take a good look at your life, not just tax forms or statements, when you get ready to file. It could make a difference.