Tax Preparation

While the coronavirus hasn’t given Americans much in the way of something nice, the Internal Revenue Service (IRS) wants taxpayers to know it actually does have something worth checking out.

Within the Coronavirus Aid, Relief and Economic Security (CARES) Act -- the government legislation that made the first round of stimulus checks possible -- the IRS is offering expanded tax benefits that can help individuals who want to make a charitable donation before 2020 ends.

Tax changes to lessen some of the economic impact of COVID-19

The CARES Act includes temporary tax modifications that can lessen at least some of the pain when it comes to paying the 2020 tax bill next year. All told, there are two changes for individual taxpayers:

New deduction for people who don't itemize. Heading the list is a change that the IRS says nearly 90 percent of taxpayers potentially qualify for. Typically, taxpayers who opt to take the standard deduction can’t claim a deduction for their charitable contributions. However, those individuals can claim a limited deduction on their 2020 federal income tax returns if they make a cash contribution* to a charity and still claim the standard deduction. 

*Note: A cash contribution includes those made by check, credit, or debit card; or amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual's volunteer services to a qualifying charitable organization. Cash contributions do not include the value of things like volunteer services or contributions of household items like you would take to an organization like Goodwill.

The all-important caveat in this deduction says that individuals can claim an "above-the-line" deduction of up to $300 for cash contributions made to “qualifying charities” during 2020. The maximum above-the-line deduction is $150 for married individuals filing separate returns. 

Itemizers can get as high as a 100 percent limit on cash contributions. Although there are certain limits, taxpayers who itemize have the OK to claim a deduction for charitable contributions if they’re made to qualifying charitable organizations. These limits run from 20-60 percent of an individual's adjusted gross income ("AGI") and vary by the type of contribution and type of charitable organization the money is donated to. 

Where this change really comes in handy is the clause in the CARES Act that permits individuals to apply for an increased limit, up to 100 percent of their AGI, for qualified contributions. That election is made on a contribution-by-contribution basis and has to be a “cash” contribution made during the calendar year 2020 to a qualifying charitable organization.

Like any change from the IRS, there are fine points to consider. The agency offers a complete list of those on its website.

Keep good records

Despite the upsides of these changes, the IRS reminds taxpayers that there are forms to be filled out and special recordkeeping to provide if a taxpayer wants to claim a charitable contribution deduction. 

“Usually, this includes obtaining a receipt or acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt. For donations of property, additional recordkeeping rules may apply, including filing a Form 8283 and obtaining a qualified appraisal,” the IRS says.

Does this apply to the new round of stimulus checks?

With Congress preparing to provide another round of stimulus checks, it’s unknown if any of the original CARES Act tax benefits will be expanded upon, but anything’s possible. 

To keep up-to-date on everything that may impact coronavirus-related tax changes, be sure to check in at IRS.gov/Coronavirus before going headlong into filling out forms and organizing copies of things like charitable contributions.

It’s still 2020 and there’s plenty of time before the next April 15 Tax Day, but the Internal Revenue Service (IRS) is encouraging taxpayers to take necessary actions now to facilitate a timely and accurate filing of federal tax returns in 2021.

The IRS knows what a crazy year 2020 has been because of the pandemic, and it’s certainly been a part of that craziness due to changing tax deadlines and extensions. Its basic reason for urging taxpayers to move ahead now is that there are several changes in forms that many filers will have to address. 

The agency says it may also help people discover potentially overlooked deductions or credits.

Changes to start preparing for

Unemployment, gig economy, or refund interest income: On top of the standard documents such as Forms W-2 from employers, Forms 1099 from banks and other payers, and records of virtual currencies, the IRS reminds taxpayers that “income” also includes unemployment income, refund interest, and any income from the gig economy. For example, this could include if an unemployed person started driving for Uber to try and keep their lives afloat during the COVID-19 intermission.

Miscellaneous Income form has changed: Also beginning in 2020, some individuals will receive Form 1099-NEC, Nonemployee Compensation, instead of Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business. The IRS suggests that anyone in that position refer to the Instructions for Form 1099-MISC -- for miscellaneous income like from a rental property -- and Form 1099-NEC to ensure they’re filing the appropriate form and are aware of this change.

The IRS also wants taxpayers who have received substantial amounts of non-wage income like self-employment income, investment income, taxable Social Security benefits, and, in some instances, pension and annuity income to consider making quarterly estimated tax payments. The last payment for 2020 is due on Jan. 15, 2021. Payment options can be found at IRS.gov/payments.

Stimulus check recipients: Taxpayers may also need Notice 1444, Economic Impact Payment (aka the stimulus check), which shows how much of a payment they received in 2020. The IRS says this particular amount is needed to calculate any Recovery Rebate Credit a taxpayer may be eligible for when they file their federal income tax return in 2021. Conversely, people who didn’t receive an Economic Impact Payment in 2020 may qualify for the Recovery Rebate Credit when they file their 2020 taxes in 2021.

Did you move during the pandemic? It may come as a surprise to those who hunkered down in their own homes since the coronavirus outbreak, but nearly 16 million people moved according to USPS data. Those taxpayers should update their records to avoid delays in tax return processing.

Double-check tax ID numbers: Taxpayers with an Individual Tax Identification Number (ITIN) should ensure it hasn’t expired before filing a tax return in 2021. For example, ITINs not used on a federal tax return at least once in the last three years will expire on Dec. 31, 2020. If the ITIN has expired, the IRS recommends taxpayers submit Form W-7, Application for IRS Individual Taxpayer Identification Number, now to renew it. Taxpayers who fail to renew ITINs before filing a tax return next year could face a delayed refund and may be ineligible for certain tax credits.

Consider having more tax withheld from paychecks: It’s not a mandatory requirement, but the IRS encourages everyone to do a “paycheck checkup” by using its Tax Withholding Estimator. This will help you make sure you have the right amount of tax withheld from your paycheck and, if not, you can adjust accordingly before 2020 ends.

The Internal Revenue Service (IRS) has announced changes that it says will offer relief to taxpayers impacted by COVID-19. 

The IRS said the changes should make it easier for consumers to set up payment agreements, as well as help people affected by the pandemic more easily resolve balances owed to the agency.

"The IRS understands that many taxpayers face challenges, and we're working hard to help people facing issues paying their tax bills," IRS Commissioner Chuck Rettig said in a statement. "Following up on our People First Initiative earlier this year, this next phase of our efforts will help with further taxpayer relief efforts."

Adjusted operations due to COVID-19

Under the new IRS Taxpayer Relief Initiative, changes to collection procedures are as follows:

• Payment plan extensions. “Taxpayers who qualify for a short-term payment plan option may now have up to 180 days to resolve their tax liabilities instead of 120 days,” the IRS said.

• Less documentation required. Certain qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing a financial statement or substantiation if their monthly payment proposal is sufficient. 

• Tax liabilities automatically added. The IRS will automatically add certain new tax balances to existing installment agreements. The agency says this new “taxpayer-friendly approach” will help some taxpayers avoid defaulting the agreement.

• More flexibility. In cases where taxpayers are temporarily unable to meet the payment terms of an accepted Offer in Compromise, the IRS says it will be “offering additional flexibility.” 

• Option to make changes online. Instead of having to talk to the IRS about having changes made to an existing installment agreement, qualified taxpayers with installment agreements paid by direct debit will now be able to make changes online. The IRS said, for example, that taxpayers could “propose lower monthly payment amounts and change their payment due dates.”

The IRS encourages consumers to “be responsive” when they receive a balance due notice.

“If you’re having a tax issue, don’t go silent. Please don’t ignore the notice arriving in your mailbox,” said Darren Guillot, the IRS Small Business/Self-Employed Deputy Commissioner for Collection and Operations Support. “These problems don’t get better with time. We understand tax issues and know that dealing with the IRS can be intimidating, but our employees really are here to help.”

Guillot said the IRS is continuing to “assess the wide-ranging impacts of COVID-19 and other difficulties people are experiencing” as it pertains to matters of tax compliance. 

The Internal Revenue Service (IRS) has released its 2021 inflation adjustments that affect more than 60 federal income tax provisions. They don’t affect what you’ll pay next year, but rather they impact your tax liability in 2022.

In 2021, the standard deduction for married couples filing jointly for the tax year 2021 will rise to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction will rise to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for the tax year 2021, up $150.

The personal exemption for the tax year 2021 remains at 0, as it was for 2020. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act. 

While the Nov. 3 election could change what you’ll pay in future taxes, currently for the 2021 tax year the top federal tax rate remains 37 percent for individual single taxpayers with incomes greater than $523,600 or $628,300 for married couples filing jointly.

The rates for people earning less than that are:

• 35 percent, for incomes over $209,425 ($418,850 for married couples filing jointly);

• 32 percent for incomes over $164,925 ($329,850 for married couples filing jointly);

• 24 percent for incomes over $86,375 ($172,750 for married couples filing jointly)

• 22 percent for incomes over $40,525 ($81,050 for married couples filing jointly)

• 12 percent for incomes over $9,950 ($19,900 for married couples filing jointly)

• The lowest rate is 10 percent for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly)

No limits on itemized deductions

For 2021 -- as in 2020, 2019, and 2018 -- there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act. However, Democrats have said they plan to reconsider that law should they regain the White House.

The Alternative Minimum Tax (AMT) exemption amount for the tax year 2021 is $73,600 and begins to phase out at $523,600 -- $114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200.

The 2020 exemption amount was $72,900 and began to phase out at $518,400, or $113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800.

The IRS also clarified what consumers can contribute to tax-deferred retirement accounts. Employees can still put away $19,500, or $26,000 if they are aged 50 or older, thanks to the catch-up contribution limit, unchanged at $6,500. 

Individual retirement account contribution limits are also the same for 2021 — $6,000 with an additional catch-up contribution of $1,000 for people 50 and older. SIMPLE retirement accounts still have the limit at $13,500 for next year.