Employment during 2020 was extremely unpredictable and many people lost jobs, were furloughed, were at work and then back at home. All these insane employment changes and several other financial factors impact how you file your taxes in 2021. There are some other changes in tax laws you may not know about and even be pleasantly surprised by as you begin the process of filing your taxes.
Changes in Income
Changes in income always affect your taxes because they affect which tax bracket you are in. The less you make, the more tax breaks you may qualify for. The more you make, the greater the amount of tax you may need to pay.
Here are some other changes in income and how these affect your taxes:
- Unemployment benefits are taxable income. Even though you may have received unemployment benefits for part or all of 2020, you still need to put that on your taxes as income.
- Self-employment income counts too. A lot of people who went into business for themselves working from home last year made some money to keep their bills paid. If you made more than $600 working for yourself, this is income the IRS wants to know about.
- Interest on savings, checking, and/or investment and retirement accounts is income. The only times this doesn’t apply is if it amounts to just a couple of dollars.
One other factor that is less common but may be counted as income is cashing out a retirement fund. The IRS considers this as “income” because something you paid into is now cashed out and turned into money you used to live. The amount can affect where you fall in the tax brackets too.
New Tax Deductions and Credits
New for tax filers this year are a series of deductions and credits to help boost the economy overall. The idea is to boost the refunds taxpayers see so that they will spend more and reinject the money into the struggling economy.
These deductions and credits include:
- Higher standard deductions for anyone that doesn’t have enough itemized deductions to file or for anyone that just files using the standard deduction.
- Higher credits for dependents.
- COVID-19 relief deductions and credits for self-employed and for employees who have had to work from home.
- Childcare tax credits, EIC, and dependent credits that can reduce what you owe or increase your refund if you have children. Some of these are bigger this year, but they are based on your income.
- Interest on school loans gets a bigger deduction this year too.
There are additional pandemic-related deductions and credits, but they are only applicable to special situations. Your accountant can walk you through anything you think might apply to your situation.
Problems With Filing Taxes Early
The biggest headache you can expect from filing your taxes this year is that many of the tax forms you may need are not yet available. Some of them will not be available until the very last week or two of January 2021. You can start the process as soon as you have your wage statements from any and all of your employers and/or your Schedule C if you were self-employed. However, you may not be able to file until these forms are ready and are disbursed by the IRS and your state government.
Plan Ahead
These exciting changes could mean a lot of money in your pocket this year. Plan ahead, because until the vaccine has been administered to at least 3/4 of the population, 2021 may be just as rough as 2020. Your accountant can can show you what you’ll get for a refund, and then offer some advice on how to pare out what you get while you wait for new unemployment benefits and/or small business pandemic relief programs to go into effect.