Filing taxes always feels a bit tedious, and this year brings particular uncertainty with changes brought on by the pandemic. Stay the course for filing your 2020 tax return while keeping these five tips in mind.
Tip #1: Leverage Technology
If you are filing without the help of an accountant or advisor, you may find it beneficial to use tax preparation software. You can input the information, and the software can populate the numbers for you. Utilizing software can help you meet compliance requirements and help streamline the process, which in turn can potentially speed up the time it takes to receive your tax returns.
Tip #2: Accuracy Over Speed
Getting an early start on the filing process can allow you the time needed to go through your returns several times before mailing or e-filing. When you are claiming deductions, make sure you’re eligible under the current IRS rules, as some rules change year-to-year.
Have a paper trail ready and simply read from what you have in front of you. Take advantage of automated systems that can funnel reported income, interest or dividends directly into your tax preparation software. Guessing is fine if you want to estimate your refund amount, but not when you report to the IRS.
Tip #3: Report Everything
You may have made several charitable contributions last year or had several income streams. Perhaps you had a few investments that didn’t yield much. Whatever it may be, you should report all of this on your return.
When using tax software, it will recognize when you’ve given enough or earned enough to affect the amount of taxes you owe. Remember, it’s better to overreport than to leave things off your returns. The IRS is likely to discover how much you’ve earned or received via reporting requirements and will know if you haven’t reported income. If this is the case, then you may have to pay a little more the next year.
Tip #4: Choose Between Standard Deduction & Itemizing
The IRS allows a standard deduction amount for those who wish to simplify filing. In 2020, the standard deduction amount is $12,400 for single filers, $24,800 for married couples, and $18,650 for head of household.1 You can reduce the taxable amount on your return using the standard deduction, however, itemizing them may enable you to reduce your taxable amount even more. Some commonly used deductions include:
- State and local taxes
- Charitable contributions
- Casualty loss
- Business expenses for which you weren’t reimbursed
- Medical expenses
- Mortgage interest
If you’re already an itemizer, you should be sure to note how the most recent changes in the tax code may have (or may not have) affected certain deductions.
Tip #5: Understand Tax Credits
Tax credits act as reductions on the amount of tax owed. It’s important to note that they do not reduce your taxable income or change your tax bracket like a deduction might.
An example is the Earned Income Tax Credit, which helps low- to moderate-income workers and their families receive tax relief. If you qualify for this, you can use the credit to reduce the taxes you owe, which can in turn, potentially increase your return.2
According to a report by the Treasury Inspector General for Tax Administration, approximately 5 million potentially eligible taxpayers do not claim the credit each year which results in about $7 billion in unclaimed benefits annually.3 To ensure you are not missing out on this opportunity, you should check for this and other tax credits for which you may be eligible.
If you have any questions this year, be sure to speak with a CPA or other trusted tax professional regarding your situation. The tax code is complicated, and even more so with the changes we saw in 2020. An experienced professional can answer your questions and empower you to start the tax season off with confidence.