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How to Set Yourself Up for a Hassle-Free Tax Season (4/4)

By taking a few simple steps now, you can greatly reduce uncertainty and stress during the 2020 tax filing season. These actions will help set you up to complete your return efficiently, without unpleasant surprises:

Start Early!

The IRS opens for tax filing season tomorrow, February 12th. With all the unpredictability of life during a pandemic, staying ahead of the tax game is more important than ever. Assemble your records as soon as possible. If you have any questions, a tax advisor can help you identify and organize the documents you need. Tax professionals will have far greater availability early in the tax season than at the last minute.

How to Set Yourself Up for a Hassle-Free Tax Season (3/4)

By taking a few simple steps now, you can greatly reduce uncertainty and stress during the 2020 tax filing season. These actions will help set you up to complete your return efficiently, without unpleasant surprises:

Be Aware of Refund Interest And Stimulus Payments

Because the processing of some tax refunds was delayed in 2020 due to the pandemic, the IRS paid interest to many refund recipients. Unlike refunds themselves, these interest payments are classified as taxable income. If you received a tax refund interest payment, the IRS will send you Form 1099-INT in January, which you will need when preparing your return.

Recipients of a 2020 Economic Income Payment (EIP, also called a stimulus payment) should have also received IRS Notice 1444, Your Economic Impact Payment. Make sure to keep this notice handy. If your EIP amount was lower than it should have been, Notice 1444 will give you the information you need to claim a tax refund for the balance owed to you.

How to Set Yourself Up for a Hassle-Free Tax Season (2/4)

By taking a few simple steps now, you can greatly reduce uncertainty and stress during the 2020 tax filing season. These actions will help set you up to complete your return efficiently, without unpleasant surprises:

Organize Records of Other Potentially Taxable Transactions

The sale of major assets like stock, a house or any other “big ticket” item may yield a taxable capital gain. Many cryptocurrency transactions (such as buying and selling Bitcoin) also have tax implications, since the IRS classifies cryptocurrencies as property. Make sure you have complete records of all your significant financial and property transactions during 2020.

How to Set Yourself Up for a Hassle-Free Tax Season (1/4)

By taking a few simple steps now, you can greatly reduce uncertainty and stress during the 2020 tax filing season. These actions will help set you up to complete your return efficiently, without unpleasant surprises:

Gather Documents Showing Wage, Business And Other Income

If you work as an employee, you should receive a W-2 from your employer(s) by early February, showing your earnings for the year and the total tax withheld from your paychecks. If you are self-employed (including gig economy work) or own a business, you should receive 1099 forms from your clients showing fees paid to you.

Interest and dividend income, along with royalties from past work, are also reported on 1099 forms. Recipients of unemployment benefits (including $600 federal Pandemic Unemployment Assistance payments) and/or taxable Social Security benefits should receive a year-end statement detailing these payments as well. Store all of these documents with your tax records.

Tax Credit, Income and Exclusion Limits Increasing for 2021 – Did You Know?

As a result of annual IRS cost-of-living adjustments, a number of federal tax credit amounts and income limits will increase in 2021. Here are some of the most significant changes affecting taxpayers at a variety of income levels.

EARNED INCOME CREDIT (EIC) CHANGES. The maximum credit amounts for taxpayers with zero, one, two, or three or more children will all increase. For example, the maximum credit for a family with three or more children will be $6,728, up from $6,600 in 2020. The income limit to receive the maximum credit, along with the maximum income at which a taxpayer may receive an EIC in any amount, will also rise from 2020 levels.

HIGHER EXCLUSION FOR ESTATE TRANSFERS. The lifetime exclusion for estate transfers and bequeathals will be $11,700,000 in 2021, up from $11,580,000 in 2020. However, the annual gift and transfer exclusion limit will remain at $15,000.

INCREASED INCOME LIMIT FOR THE LIFETIME LEARNING CREDIT. For couples filing jointly who claim the Lifetime Learning Credit, the gross income level used to calculate a reduction in the credit will rise from $118,000 to $119,000.

LARGER ADOPTION CREDIT. The maximum credit for adoption expenses will increase by $140 for 2021, up to $14,440.

HIGHER FOREIGN INCOME EXCLUSION. The foreign earned income exclusion amount will be $108,700 in 2021, a $1,100 increase over the 2020 level of $107,600.

A tax professional can help you determine whether these and other IRS adjustments could affect your 2021 taxes. If a significant change in your annual tax bill might occur, you may need to adjust your paycheck withholding amount and/or quarterly estimated tax payments.

Tax Pro

2021 Mileage Rate Changes

Starting on Jan. 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

- 56 cents per mile of business travel driven, a decrease of 1.5 cents from the rate for 2020.
- 16 cents per mile driven for medical or moving purposes (for qualified active duty members of the Armed Forces), a decrease of 1 cent from the rate for 2020.
- 14 cents per mile driven in service of charitable organizations, remaining unchanged from 2020.

You may also have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

2021 Mileage Rate Changes

Starting on Jan. 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

- 56 cents per mile of business travel driven, a decrease of 1.5 cents from the rate for 2020.
- 16 cents per mile driven for medical or moving purposes (for qualified active duty members of the Armed Forces), a decrease of 1 cent from the rate for 2020.
- 14 cents per mile driven in service of charitable organizations, remaining unchanged from 2020.

You may also have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

Tax Filing Season Start - Did You Know?

The IRS has announced that the individual tax filing season will start on Friday, February 12, 2021 and the current deadline to file 2020 tax returns and pay any taxes owed is Thursday, April 15, 2021.

Although the IRS systems open for processing on February 12, you do not have to wait until then to begin preparing for your tax return.

Quarterly Estimated Tax Payments - Reminder

If you are making quarterly estimated tax payments to the IRS, the due date for the September 1st - December 31st quarter of the year is January 15th. You may be able to skip the January 15 payment if you file your 2020 return by February 1, 2021 and pay all tax due.

For payments made using IRS Direct Pay, you can make payments until 8PM EST, and for payments using a credit or debit card, payments can be made up to midnight on the due date.

IRS & Treasury Delivering Second Round of Stimulus Payments – Did You Know?

Under the Coronavirus Response and Relief Supplemental Appropriations Act, the federal government has authorized a second round of 2020-2021 Economic Impact Payments (EIPs, also called stimulus payments) for many Americans. The IRS has already begun sending these new EIPs by direct deposit and mailed checks.

In most cases, individuals with an adjusted gross income (AGI) of $75,000 or below will receive a new EIP of $600. Joint filers with a combined AGI of $150,000 or less will generally get $600 apiece. In addition, many households may receive additional payments of $600 per qualifying child. Those with higher incomes may receive a smaller EIP or no payment at all. Note that dependents age 17 or older are not eligible for EIPs.

The vast majority of eligible Americans, including everyone who received a previous 2020 EIP, should receive these new stimulus payments automatically. There is no need to call the IRS or your bank. Simply watch for a direct deposit to your bank account, an IRS check in the mail or, in some cases, a prepaid debit card in a white envelope bearing an official U.S. Treasury seal.

For various reasons, some people who qualify for these EIPs may not receive automatic payments. If you believe you are entitled to a payment but do not receive one, a tax professional may help you claim the amount you are owed as a credit on your 2020 tax return.

Some Employees May Still Qualify to Deduct Business Expenses – Did You Know?

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the tax deduction for business expenses for most workers classified as employees. However, some employees may still qualify for a deduction by filing the proper form with their federal tax returns.

Eligible school employees may claim the Educator Expense Deduction for up to $250 of unreimbursed expenses necessary for their work, such as classroom supplies. Qualifying for this deduction generally requires working for at least 900 hours a year as a teacher, principal, counselor or classroom aide at an elementary or secondary school.

In addition, employees in the following categories may qualify to deduct business expenses:

- Armed Forces reservists, that is, members of the Army and Air National Guards, along with members of the Army, Navy, Air Force, Marine Corps and Coast Guard Reserves

- Qualified performing artists classified as employees, such professional dancers, actors and musicians employed by professional companies

- State and local government officials categorized as “fee-basis” workers (typically, these officials must pay self-employment tax)

- Employees with work expenses related to a physical or other impairment

These employees may be eligible to deduct unreimbursed “ordinary and necessary” costs related to carrying on their business as employees. Qualifying expenditures might include travel, costumes, workspace adaptations or office supplies.

A professional tax advisor can help you determine whether you qualify to deduct business expenses as an employee, and which forms you must file in order to do so.

'Tis the Season for Important Tax Paperwork

Keeping your records organized will help make sure you don't miss out on valuable deductions when it is time to file.

Some documents to be on the lookout for:

- Wage and income statements (like W-2 or 1099-MISC)
- Health Insurance statements (like Form 1095)
- Proof of qualifying educational expenses (like Form 1098-T)
- Mortgage interest statements
- Retirement distribution statements
- Investment account statements
- Charity donation receipts

IRS Warns of New Identity Theft Text Scam Related to COVID Stimulus Payments

Ever since Congress authorized the U.S. Treasury to send Economic Impact Payments (EICs, also called stimulus payments) to millions of Americans during 2020, scammers have been seeking ways to use the program to steal EIPs and personal information. A new scam involves using text messages and a fake website to steal taxpayers' identities.

Americans targeted in this scam receive a text message stating that they “have received a direct deposit of $1,200 from COVID-19 TREAS FUND. Further action is required…” The message includes a link to a fake website that looks like the official IRS Get My Payment portal for EIPs. (A link to the legitimate IRS portal is included below.)

Instead of going only to the IRS through an encrypted connection, any personal data entered into the bogus website (such as Social Security and bank account numbers) goes directly to the scammers. If you receive any text message similar to the one quoted above, it is a scam – DO NOT RESPOND. The IRS does not send unsolicited text or email messages of this sort.

To help the IRS and federal law enforcement track and close down this scam, you can take a screenshot of the text message and email it to [email protected]. Include the phone number where you received the text, the number that it came from, and the date and time of the incident (including your time zone) in your email message.

In addition, federal agencies are reminding all Americans that the IRS does not and never has accepted gift cards as a form of payment for any tax-related purpose. Anyone claiming to represent the IRS who requests payment in gift cards is a scammer. Hang up immediately to stay safe and protect your personal data.

Official IRS Get My Payment Portal for EIPs: https://www.irs.gov/coronavirus/get-my-payment

2020 Charitable Contributions Deduction – Did You Know?

Ordinarily, only taxpayers who itemize deductions may deduct charitable contributions on their federal tax returns. However, the CARES Act allows many people who do not itemize to claim a deduction for 2020 cash contributions to IRS-approved charities. Tax deductions lower a person's tax bill by reducing taxable income.

In general, individuals and couples who do not itemize deductions may deduct up to $300 for cash contributions made to qualifying charitable organizations in 2020. Qualifying organizations include many nonprofits dedicated to educational, religious, literary, and disaster and hunger relief activities. The IRS provides an online search tool (link below) to help taxpayers determine whether a particular charity qualifies to receive tax-deductible donations.

As a reminder for those who do itemize deductions, the CARES Act also sets the 2020 cash contributions itemized deduction limit at 100% of adjusted gross income (AGI) for most taxpayers, a temporary increase from the usual limit of 60% of AGI. Qualifying 2020 cash contributions in excess of the limit may be carried over as deductions for tax year 2021.

A tax professional can help you determine whether your contributions qualify for these special rules, and how to claim your deduction if so.

IRS Charitable Organizations Search Tool: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

Giving Tuesday and Charitable Donations - Did You Know?

Giving Tuesday is an annual event that highlights charitable giving after Thanksgiving.

If you are considering charitable donations, you may be able to donate to a Donor-Advised Fund (DAF) every two or three years instead of every year. This may qualify you to receive tax benefits now, allow the amount to grow tax-free, and the decision on which qualified charity to fund can be made later.

If you are 70.5 years or older, you may also be able to make a qualified charitable distribution (QCD) directly from your IRA this year. QCDs may allow the donation to be deducted from your income. A tax advisor can help you structure your charitable giving.

The IRS has released a tool to make it easier to get information about qualified charitable organizations. The Exempt Organizations Select Check tool can be found at: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

Paying Estimated Tax to Avoid Penalties – Did You Know?

With more and more people deriving income from a variety of sources, including side jobs, self-employment and “gig economy” work, the IRS has reported a substantial increase in the number of Americans who underpay federal income tax during the year. Underpayment can lead to an unpleasant spring tax surprise, including substantial penalties and interest charges.

If a significant portion of your income is not subject to paycheck withholding, you may need to make quarterly estimated tax payments to avoid incurring an Estimated Tax Penalty for 2020. Common income types that may necessitate making estimated tax payments include:

- Business income, which includes rental income, as well as income from self-employment and “gig economy” work (working for a rideshare service, mowing lawns, etc.)
- Royalties and grants, including grants in support of artistic or educational endeavors
- Interest, dividend and alimony payments
- Unemployment Insurance (UI) and Social Security benefits

It is critical for those who have received UI benefits in 2020 to learn whether they must make estimated tax payments before the year ends. Many state unemployment agencies have not withheld taxes from the federal $600-per-week federal UI benefit that was paid under the CARES Act from late March through July, or from the temporary $300 weekly federal UI payment recently implemented by Executive Order. Therefore, even those who had tax withheld from their UI benefits may not have paid enough in federal taxes to avoid penalties.

The IRS encourages Americans who have received any form of non-employee income in 2020 to do a midyear tax checkup, and begin making estimated tax payments immediately if necessary. The third-quarter estimated tax payment deadline was September 15, 2020, but those who missed the deadline can minimize penalties by making a payment as soon as possible. Fourth-quarter estimated tax payments are due January 15, 2021, although taxpayers may generally skip the fourth-quarter payment if they file a 2020 return and pay all tax due by February 1, 2021.

In most cases, taxpayers will avoid 2020 tax penalties if their paycheck withholding and/or estimated tax payments for the year add up to at least 90% of their 2020 tax, or 100% of their 2019 tax, whichever is lower. A tax professional can help you determine whether you need to make estimated tax payments this year, along with when and how much to pay.

IRS online payment portal: https://www.irs.gov/payments

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