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 income 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 income 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 the 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 as 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.
Tip #6 Know When You Need To Amend
When people receive updated information forms, that is often a sign that one has to file an amended file return. But know that this isn’t a black-and-white situation.
There are times when filing an amended income tax return is not necessary even after receiving updated information forms. If the difference in the form is not greater than $200, know that filing the amended income tax return would not be necessary.
“De minimis” errors like this will be considered as having filed containing the right information. Hence, the IRS will not penalize you for it.
Tip #7 Beware of ID Theft
ID theft is more prominent during tax season. This is a time to be more vigilant with your financial and personal information.
Electronic transactions might be convenient but we strongly recommend that you avoid sending your tax return information this way during tax season. The only exception should only be if the transaction is encrypted or if the information will be sent through a protected portal.
It would also be a good idea to become wary of phishing scams that can take the form of a phone call, social media post, or an email from a well-known and credible institution.
The IRS will almost always contact taxpayers through email. So, if someone calls you claiming to be IRS, it is most likely a scam and you should hang up the phone and refuse to provide information.
Tip #8 Remember To Renew Your ITIN
Remember that you may need a new ITIN. Your ITIN can expire if you have not been using it for federal tax returns at least once in the last three years.
If your ITIN has been released before 2013, take note that renewal is done on a rolling schedule.
But if your ITIN has been released 2020 and onwards, your ITIN will automatically expire upon failure to renew prior to the date of expiry. Hence, we recommend that you file for renewal and then send the required documents to your institution ASAP.
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.
How has your experience with income tax returns in the past year? We would love to hear your story in the comment section.