2020 Taxes: Things to Know and Credits to Claim
It is important to prepare your tax returns as soon as possible this year. That does not mean file them but just get them prepared to find out what your income was for 2020. There are many new rules and tax credits that apply for your 2020 taxes. This means that many individuals in the United States who desperately need funds could qualify for some extra relief. If you owe and want to wait till the last minute to file, it is fine. But preparing the returns early helps figure out your options.
Stimulus Payments
Congress is currently in the middle of negotiating the next COVID Stimulus package. One reason it could be advantageous for you to file your 2020 right now if your income for 2020 was lower than it was in 2019, since you may be eligible for more stimulus money with the new bill. Congress will be basing the next payment amount to taxpayers via their 2020 tax returns unless they are not filed. They will revert to 2019 returns for those individuals.
As of current news reporting February 26, 2021, an additional $1,400.00 could be coming to individuals and $2,800.00 to married filing joint couples. There is some discussion about the income thresholds for these payments. The House’s proposal also includes additional money for each dependent you have on your returns. So, if you had an additional child in 2020 you want to get your return filed so you could get additional dependent stimulus money.
The proposal from the House is more than likely going to change it is passed in the Senate, but the basics will mainly stay in place since stimulus payments are very popular and something will likely pass.
Additionally, if you did not get your first or second stimulus checks, you can still claim them as tax credits. The stimulus check is a federal tax credit for the 2020 tax year, known as the Recovery Rebate Credit. You can claim the Recovery Rebate Credit by filing your taxes for Tax Year 2020. If your 2019 income is too high to qualify, but your 2020 income was within the qualifying range for the stimulus checks, you could claim the credits on your 2020 return. Additionally, some people just did not receive their checks and the tax return is a way to ensure you can claim that money.
Earned Income Tax Credit and Additional Child Credit Tax Credit for 2020 Taxes
Some people who had lower income on their taxes for 2020 may result in a smaller refund. The Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) are credits that lower your taxes and can give you a tax refund. You may claim the credits whether you’re single or married. The EITC is available for people with and without children, even if you don’t owe taxes. However, you must have some earned income to qualify.
Lookback to 2019 Income for Credits
For Tax Year 2020, if you earned less in 2020 than in 2019, you can “lookback” to use your 2019 income or use your 2020 income when claiming the EITC or ACTC on your taxes. Without the lookback option, many would be eligible for smaller tax credits or not qualify at all. This could be from receiving unemployment (which does not count as earned income for the EITC), losing a job, or earning less money in 2020.
If you qualified for the EITC in the past and are unsure of what to expect because of employment changes, you may still be eligible for a sizeable refund with the lookback option. If this situation possibly applies to you, it is important to access your 2019 taxes when preparing your 2020 taxes. Any preparer or tax preparation software will likely ask questions about last year’s credits. If you have received EITC and ACTC in the past and do not see those credits on your 2020 return, speak to a professional tax preparer about the situation.
Refunds for 2020 Taxes
Additionally, if you qualify for a tax refund for 2020, you want to file your taxes and electronically IMMEDIATELY. The IRS is months behind on processing mail. If you mail your taxes in, you could see your refund delayed months. Additionally, the longer you wait to file your taxes the further behind in line you will be.
Plan Ahead
Additionally, one of the most important reasons to get your taxes prepared as soon as possible is to plan. Remember that even if you file an extension, any extension is an extension to file, not an extension to pay. All 2020 tax balances are due to be paid on April 15, 2021 — unless you qualify for an extension for your 2020 taxes because of the natural disaster in Texas. If you pay with your return by the extension deadline, you are subject to interest and penalties. If you know early that you will owe, then you may be able to save some money before the April deadline and or pay some of the amount down before then. Even if you cannot pay all of it before April, paying some of it will help limit interest and penalties.
Start Preparing for 2021 Taxes
Another way an early return helps you prepare is that you can adjust your financial situation to prevent owing next year. Many people have income that is relatively consistent from year to year. If you owed for 2020, then there is a good chance you would owe for 2021. Adjusting your budget now, either by changing your withholding at your W2 job or sending in estimated tax payments if you are 1099 or a business owner, will help stop or limit any balance owed for 2021’s taxes.
Having more information is always better. Even if the returns are not filed, having them finished ASAP will give you the power to make decisions and plan. Also, remember that the biggest penalty you will face is the failure to file penalty. Even if you owe and cannot pay, you want to file the return on time.
Arthur Rosatti, Esq. is a licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. If you have concerns about your tax liabilities, making estimated tax payments, or correcting your withholding, schedule an appointment with our office.