Answers to All Your 2021 Tax Questions, From Stimulus Checks to New Deductions
Start gathering your financial documents — tax time is almost here, and it's going to be a doozy.
Filing your taxes is always a nerve-wracking experience guaranteed to leave you confused, frustrated and afraid the big, bad IRS will knock on your door with handcuffs. This year will be even more complicated due to all the legislation Congress passed to help Americans deal with the pandemic. Between the suspended rules, special rules, stimulus checks and surge in unemployment, a lot has changed.
Kathy Pickering, chief tax officer at H&R Block, says she's already getting tons of questions from customers.
"COVID-19 has impacted everybody's lives in one way or another," she adds. "It's no surprise that it's also impacted people's taxes."
Don't fret; we're here to help. Here's an overview of what's different, and what you need to pay attention to, on your taxes this year.
What is the first day you can file taxes?
The 2021 tax filing season technically starts on Feb. 12, which is a few weeks later than it has in recent years. That's when the IRS will officially begin processing tax returns.
In a news release, the IRS said it pushed back the date because it needed "time to do additional programming and testing of IRS systems following the Dec. 27 tax law changes." Otherwise, it added, "there could be a delay in issuing refunds to taxpayers."
Keep in mind this only has to do with IRS processing. You can go ahead and prepare your taxes now.
Another timeline issue has to do with the filing deadline. Last year, the IRS pushed back Tax Day to July 15 because of the pandemic. This year, it's sticking to the normal schedule. Your 2020 taxes are due on April 15, 2021.
What is the current standard deduction amount?
When the Tax Cuts and Jobs Act doubled the standard deduction in 2017, it put itemizing out of style for millions of people. An estimated 90% of taxpayers now take the standard deduction, which reduces their taxable income by a set amount.
Barbara Weltman, author of J.K. Lasser's 1001 Deductions & Tax Breaks 2021, says the government also adjusted the standard deduction amounts for 2020.
For single filers, the standard deduction is now $12,400 — a $200 increase from what it was for 2019. For heads of households, it's $18,650 (a $300 increase). For married couples, it's $24,800 (a $400 increase).
How can you file taxes for free this year?
Want to file your taxes for free? If your adjusted gross income is $72,000 or less, you can take advantage of IRS Free File. The program is a partnership between the government and name-brand tax prep sites like TurboTax, TaxAct and TaxSlayer. People who qualify can use those products without paying anything.
The $72,000 threshold is higher than it was last year, when the IRS set the Free File limit at $69,000.
Some 70% of Americans qualify for Free File, but take note: The partnership only covers federal tax returns. You may still be charged to file state taxes.
Do you report stimulus checks on your taxes?
Congress has approved two rounds of Economic Impact Payments, informally called stimulus checks. One set of payments was distributed last spring; the other went out this winter.
To be clear, stimulus checks are not taxable. You do not have to report them as income. The only action you have to take regarding your stimulus checks and taxes is if you received the wrong amount of money.
Basically, as the IRS rushed to get the payments out, it realized not everyone got the right amount. So the government came up with a failsafe: the Recovery Rebate Credit. If you think you were eligible for a bigger stimulus check than you got — because, say, you had a baby in 2020 or encountered an issue with your bank account — you may be able to claim the credit. It'll either reduce your tax bill or be added onto your refund.
In order to claim the Recovery Rebate Credit, you'll need to know how much stimulus money you received and how much you are due. Take your time while calculating this: The IRS's Recovery Rebate Credit worksheet is "confounding," says Mark Steber, chief tax officer at Jackson Hewitt. Proceed with caution, and make sure you provide the right information.
On the other hand, if you think your stimulus payment was too big, you're in luck. In most cases, the IRS isn't clawing back money it mistakenly gave out in Economic Impact Payments.
What retirement withdrawals do you need to report on your taxes?
The CARES Act allowed people affected by the pandemic to withdraw up to $100,000 from their retirement accounts, including IRAs, 401(k)s, 403(b)s and others, in 2020. It also suspended the normal 10% penalty for early distributions.
But how do you pay taxes on these coronavirus-related withdrawals? The IRS said they'll be "included in your income ratably over a three-year period, starting with the year in which you receive your distribution," though you can bunch it all into one year if you'd like.
Another caveat: If you put the money back within three years of taking it, it'll "be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution," according to the IRS. This may mean you end up filing amended tax returns in the future. But for now, Steber says it's important to handle any retirement account withdrawal thoughtfully.
"You have to report it correctly, and you have to pay it back correctly," he adds. "That might not be as easy to do as you think."
Separately, the CARES Act also suspended required minimum distributions for 2020, meaning retirees who chose not to take RMDs may have a lighter tax burden. More on that here.
How does working from home affect state taxes this year?
Because of the widespread lockdowns, chances are you ended up working from home at some point in 2020. And if that meant you worked in a different state than normal, your taxes may be affected.
"There's going to be some tug of war on where virtual employees owe their state income tax," Steber says. "There's no easy rule of thumb."
Granted, not all states have income tax. But those that do may require you to apportion deductions based on how much time you spent working in which state, Weltman adds. Tread carefully if you fled the expensive city, moved back in with your parents or simply took the pandemic as an opportunity to try out a fun location. You may want to check with a tax pro to make sure you've handled your state and federal income taxes properly.
On that note, if you're a newly remote employee hoping to write off your kitchen table as a business expense, Weltman says to "forget it." Employees cannot write off home office expenses. The Tax Cuts and Jobs Act nixed these deductions from 2018 through 2025.
What do you put on your taxes if you got unemployment?
It's no secret that the pandemic wrecked the American labor force. At one point in 2020, some 60 million people had filed for unemployment; as of early January, some 16 million were still receiving benefits.
Despite widespread belief to the contrary, unemployment checks are taxable. There is a provision that lets unemployment recipients withhold funds to cover their taxes later, but some 39% of people did not opt in last year — either because they didn't know about it or were so desperate for money they wanted to access every cent. This could cause a headache come tax time.
"Leave those off, and the IRS will come calling," says Steber. "Most recipients don't elect to have withholding, and even if you do it's only 10%. It's a very low amount, so you're probably going to see some refund impact, or refund shock."
Whether you collected unemployment in 2020 can also affect your eligibility for the Earned Income Tax Credit and Child Tax Credit. Both of them are based on your earned income; unemployment income doesn't qualify.
But there is a loophole. Pickering says the IRS has instituted a special lookback rule for 2020 tax returns. You can choose to use your prior-year earned income — from 2019 — if it helps you get a better outcome for the EITC.
"It's not for everybody, but for some people, it's really going to make a big difference," she adds.
How will charitable donations work with taxes this year?
Normally, taxpayers can only get credit for donations if they itemize their returns. But the CARES Act temporarily changed that. You can now claim an above-the-line deduction for cash contributions to certain organizations you made in 2020. ("Cash" includes cash, check, credit card and debit card.)
This charitable deduction is worth up to $300. It lowers your adjusted gross income, or AGI, as well as your taxable income, making it a sweet deal.
"It's a nice, feel-good benefit for people who are supporting their favorite charities," Pickering says.
There's more good news if you're a big philanthropist who does itemize. Usually, you can choose to deduct charitable contributions up to 60% of your AGI. The IRS has temporarily lifted that cap, meaning you can now deduct up to 100%.
How do you need to report cryptocurrency on taxes this year?
The IRS has required you to disclose cryptocurrency transactions for years, but its treatment on 2020 tax returns is different. Steber says the cryptocurrency question has "now moved to a place of prominence on front page of the Form 1040." (According to Ars Technica, the decision is probably an attempt to crack down on crypto investors prone to underreporting.)
Right under your address, the form asks "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" It provides a yes or no box to check.
The placement makes hiding — or, you know, conveniently forgetting — to tell the IRS about your cryptocurrency a lot more difficult. As Steber puts it: "Everyone files page one."
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