Pitfalls to be Aware of This Tax Season

Millions of Americans took advantage of the delayed tax-filing deadline in 2020. In fact, according to one survey, 11% of taxpayers filed their 2019 returns after the July 15 extension, and 3% still hadn’t filed as of last December. The primary reason most taxpayers file late isn’t due to procrastination, but rather because they owe taxes. Among them, 24% say they don’t have the financial ability to pay and 27% admit they didn’t want to.1

However, the bad news is that even if you file for an extension, you still have to pay your taxes on time, even if you must estimate the amount paid. Any back taxes owed after the filing date starts the clock on interest and penalties.

There are several ways to estimate your taxes and get them paid on time, and good reasons to do so. If you’re a W-2 employee, you can request to have your tax withholding changed at any time during the year to reflect changes in your income. If you’re self-employed, you simply change the estimated tax you pay each quarter to align with recent earnings. It’s better to pay taxes on time than run up a penalty tab that you’d otherwise be saving or spending elsewhere. If you’d like to learn about ways to use various investment alternatives to minimize your tax liabilities, please reach out to us.

The 2020 tax season has several pitfalls due to the year’s poor economy and measures designed to alleviate its effects. For example, COVID-19 relief programs such as the CARES Act granted forbearance to many Americans carrying student loans and mortgages. Be aware that any amount of debt – including credit card debt – that is forgiven qualifies as taxable income in that year.2

“Nothing is certain except death and taxes”

-Bejamin Franklin

Other income taxpayers must report include termination benefits, such payouts for unused sick days, vacation days or severance pay. Those amounts should be included on the W-2 your former employer provides. Furthermore, unemployment benefits paid by the government also are subject to taxation.3

Speaking of unemployment, it used to be that unemployment benefits would reduce a taxpayer’s eligibility for certain credits, such as the earned income tax credit (up to $6,600), and a refundable portion of the child tax credit (up to $1,400 per qualifying child). However, this issue was adjusted in light of so many people losing income last year. When filing a 2020 return, taxpayers have the option to use 2019 income to calculate their eligibility for tax credits.4

The good news is that if you were eligible for government stimulus checks last year and didn’t receive them, you can claim that money as a Recovery Rebate Credit on your 2020 return. The bad news is that if you are past-due on child support or unpaid student loans, the IRS can withhold some or all of that stimulus credit to offset the debt you owe.5

Register for our webinar “How to Avoid a Potential Tax Storm” to find out what steps you can take to help guard against potentially higher taxes in response to the pandemic’s economic fallout.  You’ll also learn how you can convert a 401k from taxable to tax-free and keep your money in your accounts (not the hands of the government).

1 Elizabeth Renter. NerdWallet. Feb. 2, 2021. “Tax Bills Drive Millions of Late 2019 Returns and 2021 Stress.” https://www.nerdwallet.com/blog/2021-tax-report/.

2 Kimberly Palmer. 23ABC News. March 3, 2021. “Unwelcome tax surprises may await those with debt.” https://www.turnto23.com/financial-fitness/unwelcome-tax-surprises-may-await-those-with-debt.

3S The Street. Feb. 25, 2021. “5 Tax Tips for When You’re Suddenly Faced with Unemployment.” https://www.thestreet.com/personal-finance/taxes/tax-tips-sudden-unemployment-turbotax.

4 Darla Mercado and Carmen Reinicke. CNBC. Feb. 15, 2021. “This tax pitfall could affect millions due to Covid. Here’s what you need to know.” https://www.cnbc.com/2021/02/15/beware-this-tax-pitfall-if-you-had-unemployment-income-during-covid-.html.

5 Alison DeNisco Rayome and Shelby Brown. CNET. Feb. 25, 2021. “6 stimulus check pitfalls to know about during tax season.” https://www.cnet.com/personal-finance/6-stimulus-check-pitfalls-to-know-about-during-tax-season/.

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