Preparing and filing taxes is not exactly at the top of most people's preferred activities list. And during a year when there are many questions and changes brought on by the COVID pandemic it's no wonder that most of us breathed a sigh of relief when the tax deadline was extended to May 17.
Still, avoidance isn't the answer when it comes to getting your taxes done. With the help of this straightforward information, and perhaps the guidance of an experienced tax professional, you can get this task out of the way and move on to more fun things.
Changes for this year
Filing your tax return is different this year because of the legislation that was passed due to the pandemic, millennial tax expert Kesha JonTae' told TODAY.
"For example, unemployment compensation is usually 100% taxable," said JonTae'. "However, in March, Congress passed the American Rescue Plan Act that exempted up to $10,200 of unemployment compensation per person as long as adjusted gross income reported on the return was under $150,000."
Additionally, the stimulus payments that went out in 2020 and early 2021 needed to be reconciled on the 2020 tax return. "These are just two tax law changes that affect this filing," said JonTae', noting that the changes actually presented some unique opportunities for tax professionals to do some strategizing to make sure clients were maximizing their tax situation. "These strategies include married couples filing separately this year — which usually doesn’t provide an overall tax benefit — if their joint income was above the threshold to qualify for these extra tax benefits," she said.
NBC senior business correspondent Stephanie Ruhle reported that your stimulus check is not taxed like income, and that it can't be taken away from you, even if you owe money on your taxes.
"Normally you would get a tax credit, like a refund. Instead, you're getting it early, in hand now," Ruhle explained. "So you can spend it. Because we know how much people need it, you will not be taxed on it."
What about working from home?
While few of us saw the inside of an actual office once the pandemic hit, that doesn't necessarily mean you can necessarily write off your home office, Stephanie Ruhle reported. If you're a W2 employee, you have no eligibility for work from home reductions.
"One big thing that people need to know about is state taxes," said JonTae'. "For people that were working remotely but usually live in one state and work in another, your state filings may change. You may only need to file a return in the state you lived in since you didn’t physically work in the other state."
Should I do my own taxes?
You might be inclined to try preparing your own tax return to save money, or to use software such as TurboTax to save on the cost of a tax professional.
Stephanie Ruhle reported that if you make $72,000 or less the IRS Free File lets you prepare and file your federal income tax online for free with additional guided preparation. If you make more than $72,000 you can still use the IRS Free File forms but you should know how to prepare your own tax return since the additional help isn't offered here.
But whether you should actually do your own taxes depends on your filing situation and your level of comfort with knowing and understanding tax law, said JonTae'.
"You should do your tax return yourself if you’re confident that you understand your tax situation well enough to complete the return accurately," said JonTae'. "However, if you are doing your return yourself, you should understand that there’s always a chance that you might be missing something because you may not understand how to apply unfamiliar areas of the Tax Code."
JonTae' cautioned that sometimes these mistakes can end up costing you more than the tax prep fee you’re saving and can be expensive to fix. "Reach out to a tax professional if your fact pattern changes and you’re just not confident that you understand the questions being asked, you own a business or rental property, you have investments such as employee stock options and cryptocurrency or even if you just feel like you don’t want to deal with your tax return yourself," she said.
What are some frequently overlooked deductions?
If you're not taking all the deductions you can on your tax return it's like losing money.
"For people who don’t own businesses, some of the commonly overlooked deductions for 2020 are the new $300 deduction for cash donations and the $250 deduction available to educators — which now includes the cost of PPE," said JonTae'. "These are both 'above the line' deductions, which means you don’t need to itemize in order to take advantage of them."
As for itemized deductions, a big one JonTae' sees is the sales tax deduction for taxpayers that don’t live in states with income tax. "The IRS allows taxpayers to deduct either state income tax or state sales tax, and many people just miss the sales tax deduction which in many cases I’ve seen has been the difference between itemizing and taking the standard deduction," she said.
For people with businesses, some frequently overlooked deductions are the home office deduction, depreciation and mileage deduction. "These deductions can really help save money for those with small businesses," said JonTae'.
What materials do you need to gather?
Before you start your taxes or visit a tax pro, make sure you have copies of all of your tax forms.
"Grab all of your W-2s, and don’t forget about that job that you worked early 2020 before the pandemic hit!" said JonTae'. "If you picked up a side hustle such as driving for delivery services, you’ll probably get a 1099-NEC that shows how much you were paid, but you also want to make sure you print out the summary that shows how much you paid in platform fees and service charges."
If you took a distribution from your retirement account, you’ll need your Form 1099-R. "If you have a business or rental property, you’ll need a profit and loss statement that shows your total income and expenses for the year," she said. "HSA distributions will generate a Form 1099-SA, mortgage interest paid will generate a 1098. Basically, you’ll want to grab all of your tax document and bring them to your tax pro. Bonus points if they’re already out of the envelope and organized nicely."
As for that giant shoe box full of paper receipts you've been saving? JonTae's said it's not necessary.
"You don’t need to provide copies of every receipt for your deductions, but you do want to make sure you have that documentation in case the IRS ever questions it," she said.
How can we slay our tax fears?
When it comes to doing your taxes, many people worry about messing up or being audited. But JonTae' said that these fears are often unfounded and that they should definitely not paralyze you from taking action and completing your tax return.
"I think people are nervous about doing their tax return because we’ve been told that if we mess up we’re going to jail — and nobody likes jail," said JonTae'. "That’s not the case at all! 'Tax jail' is for people who intentionally defraud the government, not for people who make mistakes. If you mess up, you can fix it."
While there is no foolproof way to avoid an audit, you can take steps to make sure the process goes smoothly if you're ever selected for one.
"Don’t claim any deductions or credits you aren’t entitled to, and make sure you have or can easily obtain documentation of what you claimed," she said. "If you paid a tax professional to prepare your return, review the return before it’s filed." JonTae' stressed that it’s important to understand what’s on your return, even if you don’t understand the exact numbers. "Income, deductions and credits should make sense to you," she said. "And if you do get audited, do not ignore the IRS. It won’t just go away."
Overall, when doing your taxes, have patience with yourself — and your tax professional.
"Congress made a lot of last minute changes to the Tax Code for 2020, some even as late as March 2021," said JonTae'. "If you’re working with a tax preparer please show them some grace this year, we’re learning all the new changes and how they affect your tax return as new information is announced."
And if you have a tax bill you can't pay? Ruhle said it's important to still reach out to the IRS about payment.
"You might pay some small fees, but you're going to pay very big fees ... if you don't pay at all," Ruhle said. "So reach out to the IRS. Get yourself on a plan."