Prepare for tax season

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Typically, by midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. (For 2021, however, the filing deadline is May 17th.)

Well before the deadline, have you hunted and gathered all your documents, looked for a tax pro or software and learned about any new tax credits or deductions you might be eligible for?

You should have received a Form W-2 by Jan. 31 or, with any mail delay, soon thereafter. The same deadline applies to certain 1099-MISC forms for independent contractors.

Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by Jan. 31 as well.

Waiting until the last minute to prepare for tax filing is never advisable. If taxpayers work for one employer, their taxes may not be complicated, but if they have side gigs or they’re self-employed, tax returns can take a while to fill out.

Before taxpayers file, here are some tasks they need to do.

Related: What
happens if I miss the tax filing deadline?

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1. Decide on Hiring a Pro or DIY

Prepare for tax season

Taxpayers can either prepare and file their taxes on their own or hire a professional. If they choose the latter, they can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro.

The costs for a professional vary, and the more complicated a return is, the higher the costs will be.

The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications.

If you’re going it alone, IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income:

  • You can file on an IRS partner site if your adjusted gross income was $72,000 or less. This is a guided preparation, and the online service does all the math.
  • Those with income above $72,000 who know how to prepare paper forms and can do basic calculations can fill out and file electronic federal tax forms. (There is no state tax filing with this option.)

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2. Collect Tax Documents

Prepare for tax season

By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and 1099s for contract workers or freelancers.

Employers will send the documents in the mail or electronically.

Investors might receive these forms:

  • 1099-B, which reports capital gains and losses
  • 1099-DIV, which reports dividend income and capital gains distributions
  • 1099-INT, which reports interest income
  • 1099-R, which reports retirement account distributions

Other 1099 forms include:

  • 1099-MISC, which reports payments in lieu of dividends
  • 1099-Q, which reports distributions from education savings accounts and 529 accounts

If taxpayers won anything while gambling, they’ll need to fill out Form W-2G. If they paid at least $600 in mortgage interest during the year, they’ll receive Form 1098, whose information can be used to claim a mortgage interest tax deduction.

A list of income-related forms  can be found on the IRS website.

Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used.

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3. Look Into Deductions and Credits

Prepare for tax season

Take the standard deduction or itemize deductions? The higher figure is the winner.

The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.

For tax year 2020, the standard deductions are:

  • $12,400 for a single filer
  • $24,800 for a married couple filing jointly
  • $12,400 for a married couple filing separately
  • $18,650 for a head of household

Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, health care deductions and investment-related deductions.

The IRS notes that you may benefit from itemizing deductions if any of these apply:

  • Don’t qualify for the standard deduction.
  • Had large uninsured medical or dental expenses during the year.
  • Paid interest and taxes on your home.
  • Had large uninsured casualty or theft losses.
  • Made large contributions to qualified charities.
  • Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.

Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.

There are family and dependent credits, health care credits, education credits, homeowner credits, and income and savings credits.

Taxpayers can see the entire tax credits and deductions list  on the IRS website.

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4. Make a Final Estimated Tax Payment

Prepare for tax season

Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change.

In 2020, the first two quarters of taxes were due on July 15. The third was due on Sept. 15, and the fourth was due on Jan. 15, 2021.

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5. Apply for a Payment Plan If Needed

Prepare for tax season

Another way to prepare for taxes is to apply for a payment plan with the IRS, if that seems necessary.

Just know that penalties and interest will accrue until you pay off the balance.

For the 2020 tax year the IRS issued revised COVID-related collection procedures. They include:

  • Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days.
  • Qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing substantiation or a financial statement if their monthly payment proposal is sufficient.
  • The IRS is offering flexibility to some taxpayers who are temporarily unable to meet the payment terms of an accepted offer in compromise (settlement of a tax bill for less than the amount owed).
  • With a long-term payment plan, taxpayers may pay taxes for a period of more than 120 days with monthly payments.

In general, the payment plans are available to individuals who owe $50,000 or less in combined income tax, penalties and interest or businesses that owe $25,000 or less, combined, that have filed all tax returns.

A short-term payment plan has a $0 setup fee online, by phone, mail or in person.

A long-term payment plan has a $31 setup fee online, $107 by phone or mail, or in person. (The setup fee is waived for low-income payers.)

Taxpayers can pay for the plans on the IRS’s website.

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6. Decide Whether to File for an Extension

Prepare for tax season

If you need more time to prepare your federal tax return, you can electronically request an extension until Oct. 15 to file a return.

To get the extension, you must estimate your tax liability and pay any amount due by April 15 to avoid penalties.

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7. Look Into CARES Act Provisions

Prepare for tax season

The CARES Act was passed in March 2020 to help Americans during the COVID-19 crisis. The act included the Federal Pandemic Unemployment Compensation program, which gave people who were collecting unemployment compensation an extra $600 per week through July.

At the end of 2020, the president signed a $900 billion coronavirus relief bill, which gave people earning unemployment an extra $300 per week for up to 11 weeks. Unemployment assistance does count as income, which means the base amount and the enhancements of $600 and $300 are taxable.

Most government agencies were to provide a paper copy of Form 1099-G, reporting unemployment compensation, by Jan. 31 of the year after the year of payment.

Other programs under the CARES Act aimed to assist struggling business owners. They include the Paycheck Protection Program, the Employee Retention Credit, Economic Injury Disaster Loans and Payroll Tax Postponement.

The PPP program gave employers the chance to borrow up to 2.5 times their average monthly payroll, or up to $10 million, to cover workers’ paychecks. A forgiven PPP loan is not taxable under federal law, and business owners can deduct qualifying expenses paid with the money from the forgiven PPP loan, according to the U.S. Small Business Administration.

With Economic Injury Disaster Loans, business owners could borrow up to $2 million or they could receive a cash advance, which would not need to be repaid, up to $10,000. Emergency EIDL advances aren’t included in income, and taxpayers can deduct business expenses they paid using the advance, Bloomberg Tax notes.

The Employee Retention Credit, which gave employers a tax credit for keeping workers on the job, could reduce expenses that business owners would otherwise pay on their federal return and is not counted as income, according to the IRS.

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Special Distribution Provisions

Prepare for tax season

Another CARES Act provision provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.

The IRS lays out the rules in a piece titled “Coronavirus-related relief for retirement plans and IRAs, questions and answers.”

In general, an individual could take a distribution of up to $100,000 from employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs without the typical 10% additional tax on early distributions (before age 59-and-a-half).

The provision also increases the limit on the amount that a qualified individual can borrow from a retirement plan. An IRA does not count. It permits a plan sponsor to offer qualified individuals up to one additional year to repay their plan loans, too.

The criteria for qualified individuals can be found on the IRS’s website, but it basically says that individuals who had the coronavirus or had a spouse or dependent with the virus or who experienced financial hardship because of coronavirus would be eligible.

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The Takeaway

Prepare for tax season

“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable isn’t the best choice. Prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY and learning about new tax credits and deductions.

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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