Are you anticipating a tax refund or a stimulus test? 5 issues to know earlier than submitting your taxes

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  Are you expecting a tax refund or a stimulus check?  5 things to know before filing your taxes

This year’s tax season begins against a completely different background.

About 18 million people receive some form of unemployment benefit and savings rates are falling along with personal income. Between August and December, more and more people said it was difficult to pay normal household expenses.

Income tax refunds – and missed stimulus check claims – may not be a welcome spike in cash this year. You could be a financial lifeline.

Refunds last year averaged $ 2,535, which is more than the first stimulus check of $ 1,200 and the second payment of $ 600 combined.

The Internal Revenue Service knows the operations until February 12, the date when returns begin accepting and processing. This is “one of the most important filing seasons in the country,” said IRS Commissioner Charles Rettig.

In addition to the new context this year, there are some new rules and regulations. Here’s what you need to know to get the most out of a busy tax season.

You may need additional documents in addition to a W-2 form

Of course, there are the usual tax documents to collect. These include W-2 for displaying wages and withholding, and 1099 for independent contractors and gig workers.

If someone turned to gig work in 2020 to make up for lost income elsewhere, they may not realize the range of deductible business expenses that can lower their self-employment taxes and income taxes, according to Nancy Rossner, executive attorney at Community Tax Law Project, which provides legal assistance to low-income Virginia taxpayers.

For example, if someone became a driver for companies like Uber UBER (-2.65%) and Lyft LYFT (-0.60%).,
Your cleaning supplies would be tax deductible, as would the mileage if the vehicle is used for business purposes. More information on the IRS rules for gig workers can be found here.

Another important document is the 1099-G, which is a form that summarizes the amount of unemployment insurance payments for 2020 for an individual and their amount for income taxes.

State employment agencies that manage jobless claims will send the form, Rossner said. She fears that there may be unemployed people who do not withhold income tax and who may now face a tax burden. “This is something we have been concerned about in our community,” she said.

Taxpayers should file electronically and provide direct deposit information for the fastest turnaround, says the IRS.

Find this vital form if you’re looking to spend more money on stimulus checks

There are a variety of reasons why people may have missed all or part of a stimulus check on the first or second round.

For example, they may have made too much money when the IRS reviewed the 2018 or 2019 tax returns to distribute the check for $ 1,200 and the 2019 tax returns for the check for $ 600. Or the payments may not take into account a recently born child. If they have not previously filed taxes, they may have missed the November 21st deadline for registering payment information with the IRS.

All of these individuals can apply for Recovery Rebate Credit payment when they submit their 2020 returns.

To do this, the IRS says they should stick to a form that the agency sends to the recipients who document the payments. There is note 1444 for the first payment round and note 1444-B for the second. These documents indicate the amount paid, how the amount was paid and how payments not received are reported.

The IRS says it will send the notification to the last known address of each recipient within 15 days of the payment being sent.

In the coming weeks, people who have created online accounts with the agency will be able to see the amounts they paid, the IRS said.

Prepare for a possible “shock” when the money for the stimulus check arrives on a tax refund

When the IRS started making business stimulus payments, it was made clear that these amounts were not considered taxable income and would not affect the amount of an individual’s future refund. In addition, the rules for the second round of payments made it clear that the $ 600 check would not be subject to any garnishments or overdue child support payments.

However, some things change when people collect the missed stimulus check money through their tax returns.

As the Ways and Means Committee explains, the “True Up” amounts from the Recovery Rebate Credit are included in the taxpayer’s income tax refund. And once the stimulus money for an income tax refund falls into that pot, it is subject to “the garnishment and set-off rules that generally apply to federal income tax refunds,” the committee said.

The IRS says it can reduce refunds to pay for things like past due child child support payments, state income tax debts, and other non-taxable debts to the federal government.

Recovery Rebate Credit is “just like any other loan you might get for your tax returns,” said Caleb Smith, associate clinical professor at the University of Minnesota Law School. Defaulted student loans are generally another cause of offsetting, but Smith said it was not immediately clear how the rules governing these defaults apply because student loan payments have been interrupted.

The potential for offsets “will come as a shock to some people that it will not be protected,” Rossner said, adding that the scenario “appears unfair, unjust”.

Note the changes in tax credits for low and middle income households

A result of the $ 900 billion bailout bill passed in December was a look back at the Earned Income Tax Credit (EITC) and Child Tax Credit, two credits for working class families.

Both loans are linked to earned income, so the pandemic puts loan recipients at risk of first losing their jobs and then reducing their tax credits for losing their jobs.

“It’s safe to say that the architects of Earned Income Tax Credit anticipated an event like we saw last year,” said Timothy Flacke, executive director of Commonwealth, a nonprofit focused on financial security.

Because of this, in the $ 900 billion bailout package, lawmakers said that people who claim the loan can “look back” on their 2019 return and apply the amount of income earned there to their 2020 return.

The determination only works if people know about it, said Flacke. He advises people to have their 2019 return on hand so a tax professional can see if it is best to use the hindsight provision.

“Most of us will get help. Just bring the document with you, ”said Flacke. What worries him is a scenario where a person has their tax deadline but not their past return, and they just want to finalize their 2020 statement – “and literally thousands of dollars are at stake.”

Refunds for returns claiming the EITC are due to arrive in bank accounts from the first week of March. President Joe Biden wants to increase the payouts on both loans, but this requires Congress approval.

Don’t forget your donations

Charitable donations were already deductible, but changes in the CARES law sweetens the tax incentives for many people.

Under the CARES Act, taxpayers filing their 2020 tax returns could get the standard withholding – which most do – and also deduct charitable contributions of up to $ 300. Before the change, it only made sense for tax purposes to write off the contributions once you had itemized your deductions.

In a hypothetical case, taxpayers earning $ 100,000 could cut their tax burden by $ 66 if they donated $ 300 over the course of the year.

Teachers could also be entitled to a second “above the line” deduction this year. Educators can take the standard deduction and claim up to $ 250 for non-reimbursed educational expenses. This can be books, teaching materials and computer costs.

Robert Greene, an accountant specializing in teacher tax returns, said educators this year should feel free to include their out-of-pocket expenses on hand sanitizer, masks, and other types of personal protective equipment.

“It is really all the supplies that Teacher thinks are ‘common and necessary’,” he said.