A Guide to Filing your Taxes in 2021
The 2021 tax filing season is here. If you visit the IRS website and have a look around, there really is no simple tax guide to get you started, and things can seem overwhelming for individuals not versed in the U.S. tax code. If you’re a first-time tax DIYer, you’re often on your own as far as figuring out the basics of how to do taxes. So I wanted to lend a hand. This article will highlight a good chunk of the basics on how to do your taxes. Disclaimer: I’m not an accountant or tax pro, so don’t view me as such, just someone who has been DIYing my own taxes for a while.
When you’re ready to file your taxes, the following tips should help you with noteworthy dates, credits, deductions, reminders, and some of the most common deductions, credits, deadlines, the best and cheapest e-file tax prep software, and more.
What’s New for the 2021 Tax Season (2020 Tax Year)?
Here are a few noteworthy changes for filing your 2020 taxes:
- The tax filing start date was pushed back to February 12 this year, versus late January.
- The 2021 IRS tax filing deadline was extended to May 17 as a COVID relief measure.
- A number of state tax deadlines for 2021 have also been extended.
- There is a new $300 charitable donation deduction that any taxpayer who made a $300+ cash donation to an eligible charity can claim – whether they claim the standard deduction (which is new) or itemize. The maximum deduction is $300 per filer in 2020, but the 2021 maximum charitable donation deduction for non-itemizers was increased to $600 for those who are “married filing jointly”.
- The American Rescue Plan Act create a number of tax code changes. Most notably:
- The Child Tax Credit was increased for 2021.
- Relief payments will be sent to most households based on 2019 or 2020 AGI.
- The first $10,200 in UI benefits in 2020 non-taxable, to help avoid surprise tax liability for households with income below $150,000.
- Additional ACA and COBRA subsidy assistance, based on income, was approved for 2021.
- The Earned Income Tax Credit will see the maximum benefit increased to $1,502 (from $543) for childless adults for 2021 only.
- The Child and Dependent Care Credit is expanded for 2021 from a maximum of $3,000 to $8,000 for households with up to $16,000 in care expenses.
- You would not need to pay income taxes on forgiven student loan debt, if you qualify for loan forgiveness or cancellation. This would apply to debt forgiven between Jan. 1, 2021, and the end of 2025.
- With past and potentially future stimulus/relief payments, if you are still owed any (often due to a declining income in 2020 versus 2019 or not filing a tax return in 2019), you can claim them in the form of a “Recovery Rebate Credit” on your tax return. The credit, if owed, is refundable and reduces any income tax owed, dollar-for-dollar. It’s recommended that you file a tax return, even if you don’t meet the minimum income requirement to file taxes, in order to receive any credits owed. Received stimulus payments are not taxable.
Under the COVID-related Tax Relief Act of 2020, taxpayers can use their 2019 earned income to figure their 2020 Earned Income Tax Credit if their 2019 earned income was more than their 2020 earned income. A similar rule change also applies for the Child Tax Credit.
- There is a new 1099-NEC form, which replaces the 1099-MISC box 7, and documents non-employee compensation (e.g. freelance, gig work).
- Self-employed workers may be able to claim a new credit for sick and family leave that was created by the Families First Coronavirus Response Act.
- There are some notable new FSA carryover changes with COVID relief legislation. Your employer’s FSA doesn’t strictly have to apply the “use it or lose it” provision, meaning you can roll-over unused funds from 2020 to 2021 and/or 2021 to 2022 (if your employer allows it). This is a temporary COVID relief measure. Check with your employer for more info.
- The tax brackets and standard deductions were modified for inflation.
A Number of Major Tax Breaks were Restored for 2020
Additionally, as previously highlighted in my tax extenders article, a number of major tax breaks were previously restored for the 2020 tax year. Check out that article for more details on the following:
- Non-Business Energy Property Tax Credit (home energy efficiency upgrades)
- Fuel Cell Motor Vehicle Credit
- Plug-in Electric Motorcycle Credit
- Alternative Fuel Vehicle Refueling Equipment Credit
- Tuition & Fees Deduction (this was repealed for years following 2020, however)
- Medical Expense Deduction (for itemizers, qualifying medical expenses that exceeded 7.5% of their adjusted gross income is now permanent due to recently passed legislation)
- Mortgage Debt Exclusion
- Mortgage Insurance Premium Deduction
- Mortgage Debt Exclusion
And yes, you may be able to amend your return, if eligible for one of these for a prior tax year. Instructions on that below.
What Tax Forms do You Need to do your Taxes?
Before you get started, you’ll need to get tax forms from your employer(s), bank(s), brokerage(s), and more. Without proper forms, you can’t do your taxes. Common forms include:
- W-2: covers income, withholding, etc. from your employer
- 1095A: if you bought health insurance on a state or federal exchange.
- 1098: covers mortgage interest paid, over $600.
- 1098-T: higher education expenses paid.
- 1098-E: student loan interest paid.
- 1099-B: investment brokerage statement that covers gains/losses from trades.
- 1099-DIV: investment brokerage statement that covers any taxable capital gains or dividends paid out to you.
- 1099-INT: taxable interest exceeding $10, typically from a savings, checking, CD, or money market bank account.
- 1099-MISC: miscellaneous income exceeding $600 from any one source (i.e. freelance or consulting.
- 1099-NEC: a new form for freelance/gig-worker income. NEC = “nonemployee” compensation.
- 1099-SA: if you took distributions from an HSA, this form documents how much.
If you have not yet received forms you are expecting, I would recommend logging in to the respective account online and trying to find the form there to download.
Do I Need to File a Tax Return?
You may be wondering “Do I need to file a tax return?“. In fact, there may be scenarios where you do not need to file a tax return, including if your income is below specified minimum income thresholds. However, even in these scenarios, it may still be advantageous to file a federal tax return, as you may be eligible for at least one of a number of refundable tax credits from the IRS, economic relief payments, and more.
Get an Identity Protection PIN and/or File your Taxes Early to Help Prevent Tax Identity Theft
Tax identity theft fraud is a problem. This occurs when fraudulent tax returns for refunds are filed in your name.
In 2021, you can get an IRS Identity Protection PIN to help prevent tax fraud. The PINs are available to all taxpayers for the first time. Think of it as a 2-factor authentication for tax filing.
If you don’t get a PIN, the longer you wait to file a return, the greater the chance someone could fraudulently beat you to it and claim a refund in your name. If you file sooner, you reduce that risk.
If you have self-employment income, you should also consider using an IRS EIN number in place of a Social Security Number to help limit the possibility of SSN theft.
How Should I File my Taxes?
Last year, 152,802,000 of the 168,650,000 returns, or 90.6%, were e-filed. E-filing is the quickest, safest, and most reliable way to file.
Where Should I E-file?
There are many cheap or free ways to e-file. Below are a few deals from the best vendors (with exclusive steep discounts via affiliate partnerships):
My two favorite (and my picks for the best tax software programs) are:
Other popular tax prep programs include:
How Should I Pay My Taxes?
For reasons I just highlighted, I recommend that you pay your taxes online – it’s quicker, safer, more reliable, and can help prevent identity theft tax fraud.
There are ways to actually pay your taxes with a credit card and profit. With estimated tax payments, there are abundant opportunities to do so (if you do it wisely).
When can I Start Filing my Taxes this year?
The tax filing start date is February 12, 2021. So long as you have all of the required income, deduction, and other tax forms you are expecting, you can begin filing your return ASAP.
When is the Tax Deadline?
This year’s IRS tax filing deadline is Monday, May 17, 2021 – pushed back from the standard April 15 deadline. No weekend extensions to push it beyond the 15th this year, as in recent years.
The tax filing deadline AND payment deadline, if you are out of country, is Tuesday, June 15, 2021.
Note that these are the dates that you must have your return postmarked or e-filed.
If you have income from self-employment or other income that is not typically withheld, you may need to make estimated tax payments throughout the year. The due dates are as follows:
|Time Period:||Estimated Tax Payment Date:|
|January 1 - March 31||April 15, same year|
|April 1 - May 31||June 15, same year|
|June 1 - August 31||September 15, same year|
|September 1 - December 31||January 15, subsequent year|
What if I Need to File a Tax Extension?
If, for one reason or another, you are unable to file your tax return by the May 17 tax deadline, you can file for an IRS tax extension, which will extend the due date of your filing by 6 months (October 15). The extension must be postmarked by the May 17 deadline also.
Also, a key disclaimer – an extension of time to file is not an extension of time to pay. Any taxes due are still due on the normal filing deadline date.
How to File a Tax Extension
In order to file a tax extension, you will need to fill out IRS form 4868 by the tax deadline. Note that filing the extension does not get you off the hook, you still need to pay any estimated taxes due by the revised May 17 deadline. If you don’t you will owe interest and possibly a penalty on your taxes owed.
Important note: filing the extension does not mean you don’t have to pay expected taxes for 6 months. You still need to pay estimated taxes by the tax deadline. If you don’t, you could owe interest and possibly a penalty on taxes owed.
What if I Need to Amend my Tax Return?
If you’ve already filed your taxes, but later found your return to be incorrect or incomplete, here is how to file an amended tax return with the IRS. You may also need to file an amended state return.
Can I Still Lower my Tax Obligation for Last Year?
Yes. Even after a calendar year is over, there are still last minute tax deductions and credits that can lower your taxes, up until the tax deadline.
You can contribute to personal retirement accounts, such as a Roth or traditional IRA, Keogh Plan, HSA (believe it or not), or SEP IRA. Contributions are considered tax-deductible since you will pay taxes on that income when you withdraw funds. The IRA contribution deadline and HSA contribution deadline are the same date as the tax deadline (an extension from the traditional to new tax deadline has not yet been confirmed by the IRS).
Contributing will lower your overall adjusted gross income (AGI) and potentially bring you a bigger return or cut the taxes you owe. And it’s an “above the line” deduction, which means that you do not need to itemize to claim it.
Make sure your income is eligible for these contributions, based on income level, before you contribute. If your income is low enough, you might also qualify for the Saver’s Credit for contributing to one of these types of retirement accounts.
However, it is too late to take advantage of many tax deductions for 2020, such as charitable contributions or employee contributions to tax advantaged accounts (i.e. 401Ks, 403Bs, 457Bs). The deadline to contribute was the final day of the calendar year.
Should I Take the Standard Deduction or Itemize My Taxes?
If you have a sizable amount of tax credits and deductions, it wouldn’t hurt to run the numbers to see if itemizing your taxes could result in a lower tax obligation for you versus a standard deduction. Itemizing deductions could even put you in to a lower tax bracket.
With the Tax Cut & Jobs Act enacted a few years ago, the standard deductions had nearly doubled, and significantly fewer taxpayers are itemizing deductions (only about 10% vs 40% previously).
The standard deductions for 2020 are:
- $12,400 for single filers
- $12,400 for married, filing separately
- $24,800 for married filing jointly
- $18,650 for head of household
- $0 personal exemption
If your itemized deductions don’t surpass those amounts, the standard deduction is the way to go (and it’s simpler).
The Most Popular Tax Deductions and Credits
If you did any of the following during 2020, it could impact your tax filing:
- If you made home energy efficiency improvements? You could qualify for an energy tax credit. The credits for efficiency-improving items like windows, doors, furnaces, etc. were restored for 2020. The sustainable credits for solar, fuel cells, wind, and geothermal also live on.
- Pay interest on a mortgage or property tax? Both are deductible. The state and local property, income, and sales taxes (SALT) deduction is capped at $10,000.
- Buy an electric or plug-in electric vehicle? You may be eligible for an electric vehicle tax credit from the IRS (and potentially receive a state electric vehicle tax credit too) – but beware, electric vehicle tax credit phaseouts have already been in effect for a few manufacturers, such as Tesla and GM.
- If you have earned income below certain levels, you might be eligible for the Earned Income Tax Credit (EITC).
- If you sold investments at a loss and those losses were greater than your gains, you could claim a capital loss tax deduction.
- Have a child this year or act as guardian for at least half a year? You could claim a Child Tax Credit. The maximum amount is now $2,000, and it is refundable up to $1,400.
- Have self-employment income? You may be able to deduct business related expenses and your home office and can contribute a portion of your income to self-employment retirement accounts, such as a solo 401K or SEP IRA. And you may still be able to contribute for last year.
- Participate in the sharing economy? The IRS has created a Gig Economy tax guide to help you make sense of deductions (and income) that you should report.
- There is a 20% deduction for incomes from “pass-through” entities (partnerships, S Corps, sole proprietorships) for most business types.
- Contribute to an HSA outside of payroll? That’s deductible.
- Pay tuition or have other education related expenses? There are education tax credits and deductions that you can claim.
- Make charitable donations? You can still deduct them if you itemize, but most will be better off claiming a standard deduction. Note that there is a IRS maximum charitable donation limit. There is a new exception for cash donations, which I highlighted in the “What’s New” section.
What if I Got a Refund?
Getting a tax refund is not a good thing. A refund is the equivalent of loaning your paycheck to the federal government, interest-free, over the prior year. And refunds typically result in a spending spree that I like to call Tax Refund Windfall Syndrome.
The average tax refund last year was $2,535. That’s $2,535 in interest-free loans from 125,299,000 lenders (aka taxpayers), for a combined $317.7 billion. This works out to just over 74.3% of returns resulting in a refund.
If you’re overpaying and want to stop giving out an interest-free loan to the government, use the new IRS withholding tax analyzer in coordination with the new W-4 form. The goal should be to aim for a slight amount due back to the government, without having to pay a penalty. That way, you’re the one getting the interest-free loan, and you have more money over the rest of the year that you can save in employer sponsored retirement accounts.
How Can I Check my Tax Refund Status?
If you start getting worried or just plain impatient, you can check on your tax refund status.
Beware of scams in the form of helping you check your refund status. Keep in mind that the IRS will never send you an email with this option. To check it, you should go to www.irs.gov and click ‘where’s my refund‘.
What is the Presidential Election Campaign Box on the 1040 Form?
Ever wonder what the ominous Presidential Election Campaign box on your 1040 form does and if it has an impact on your taxes due (or refund)? It has no impact on your tax filing, and the funds are the only source of public financing for Presidential primary and general elections. Funds also go towards pediatric cancer research through the NIH. So go ahead and check that box!
How Long Should you Keep your Tax Records?
There are varying opinions on how long to keep your tax records. I tend to err on the side of caution when it comes to being ready for possible audits. The IRS has a 3-year period of limitations, within which you can be audited or amend your returns.
However, if they have reason to believe that you have filed a fraudulent return or no return at all, they can audit you at any time. Some states have a statute of limitations that is longer that 3 years as well. So, I personally recommend keeping 3 years of paper documentation, but then going the extra step of digitizing documentation and keeping it stored securely in the cloud. It will help you sleep easier at night.
Tax Tips from Readers
Here are a few tips from readers from the H&R Block contest that I recently ran:
Favorite tax tips:
1. Keep track of all your receipts for itemized deductions (i.e., charitable contributions throughout the year, DMV license fee receipt etc). This can be an email folder and a physical folder at the house that makes tax time a breeze.
2. Keep track of the mileage driven for volunteering at your favorite nonprofit because you can write off $0.14 per mile if you itemize your taxes.
3. Always double check the “Tax Software” section of “Money Saving Products I Use” on 20somethingfinance.com before filing your taxes.
I pay for everything online with a credit card. When I receive the receipt or confirmation by email, I place it in the folders I created in my email pertaining to taxes. Makes it so easy for me to locate all the tax specific items.
My interesting story is I attempted to do taxes on my own and claimed some things the incorrect way. Me trying to save money, it ended up costing and I had to go to H&R block to fix the mess, plus pay back the IRS! I better stick to the professionals!
I have a multi-pocket Folder that contains each Tax Category….Income/Expenses/Medical/Misc. I add my receipts to each in date order. By the end of the year I am totally organized.
When I get tax forms in the mail, or print from email, I will highlight the name (mine or spouse), form number, and year. I will also write the same info in the top right of the page so that I can quickly find what I am looking for when rifling through a stack of papers.
If you inherited an IRA in 2020, you were not required to take an RMD because of the CARES act. In 2020 it may be the same, depending on whether current legislation passes the Senate.
Thanks all, and happy filing!
Tax Return Filing Discussion:
- Have you started or finished your tax return yet?
- How did you first learn how to do your taxes?
- Are you expecting a refund or taxes owed?
- What are your favorite tax tips?