Click on the links below to jump to each section in this article:
- Do You Need To File a 2020 Tax Return?
- Relief for Taxpayers Struggling With Tax Debts
- Five Tax Tips for Older Americans
- New Year, New Withholding?
- Who Qualifies for the Earned Income Credit
Do You Need To File a 2020 Tax Return?
Most people file a tax return because they have to, but even if you don’t, there are times when you should – because you might be eligible for a tax refund and not know it. The tax tips below should help you determine whether you’re one of them.
General Filing Rules
Whether you need to file a tax return this year depends on several factors. In most cases, the amount of your income, your filing status, and your age determine whether you must file a tax return. For example, if you’re single and 24 years old, you must file if your income was at least $12,400. If you are age 65 or older, income thresholds are higher ($14,050 in 2020 for single filers). If you’re self-employed (see below) or a dependent of another person, other tax rules may apply.
Tax Withheld or Paid
Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year, and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund, but you have to file a tax return to receive the refund.
Eligibility for Certain Tax Credits
1. Premium Tax Credit. If you, your spouse, or a dependent was enrolled in healthcare coverage purchased from the Marketplace in 2020, you might be eligible for the Premium Tax Credit – but only if you chose to have advance payments of the premium tax credit sent directly to your insurer during the year. However, you must file a federal tax return and reconcile any advance payments with the allowable premium tax credit.
2. Earned Income Tax Credit. Did you work and earn less than $56,844 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,660. If you qualify, file a tax return to claim it.
You may elect to use your 2019 earned income to figure your EITC if your 2019 earned income is more than your 2020 earned income.
3. Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit and receive a refund even if you do not owe any tax.
4. American Opportunity Tax Credit. The AOTC (up to $2,500 per eligible student) is available for four years of post-secondary education. You or your dependent must have been a student enrolled at least half-time for at least one academic period. Even if you don’t owe any taxes, you still may qualify; however, you must complete Form 8863, Education Credits, and file a return to claim the credit.
5. Health Coverage Tax Credit. If you, your spouse, or a dependent received advance payments of the health coverage tax credit, you will need to file a 2020 tax return. Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments, shows the amount of the advance payments.
You must file a return in other situations as well, including, but not limited to the following situations:
- You owe special taxes such as the alternative minimum tax (AMT), additional tax on qualified plans such as an individual retirement arrangement (IRA), or another tax-favored account, or household employment taxes. However, if you are filing a return only because you owe these taxes, you can file Schedule H, Household Employment Taxes, by itself.
- You (or your spouse, if filing jointly) received Archer MSA, Medicare Advantage MSA, or health savings account distributions.
- You had net earnings from self-employment of at least $400.
- You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.
If you have any questions about whether you should file a return, please contact the office.
Relief for Taxpayers Struggling With Tax Debts
While there have always been payment options available from the IRS to help taxpayers struggling to pay tax debts, the new IRS Taxpayer Relief Initiative was put into place to expand these options and offer relief during the pandemic. These revised COVID-related collection procedures will help taxpayers, especially those who have a record of filing their returns and paying their taxes on time.
These types of relief are not automatic. Taxpayers need to request payment relief by contacting the number on their balance due notice or responding in writing.
Highlights of the Taxpayer Relief Initiative
- Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days.
- The IRS is offering flexibility for some taxpayers who are temporarily unable to meet the payment terms of an accepted Offer in Compromise.
- The IRS will automatically add certain new tax balances to existing Installment Agreements for individual and business taxpayers who have gone out of business.
- Certain qualified individual taxpayers who owe less than $250,000 may set up Installment Agreements without providing a financial statement if their monthly payment proposal is sufficient.
- Some individual taxpayers who only owe for the 2019 tax year and owe less than $250,000 may qualify to set up an Installment Agreement without a notice of federal tax lien filed by the IRS.
- Qualified taxpayers with existing Direct Debit Installment Agreements may be able to use the Online Payment Agreement system to propose lower monthly payment amounts and change their payment due dates.
If you owe taxes to the IRS, don’t hesitate to contact the office about your options. Help is just a phone call away.
Five Tax Tips for Older Americans
Everyone wants to save money on their taxes, and older Americans are no exception. If you’re age 50 or older, here are five tax tips that could help you do just that.
1. Standard Deduction for Seniors. If you and/or your spouse are 65 years old or older and do not itemize your deductions, you can take advantage of a higher standard deduction amount. There is an additional increase in the standard deduction if either you or your spouse is blind.
2. Credit for the Elderly or Disabled. If you and/or your spouse are either 65 years or older–or under age 65 years old and are permanently and totally disabled–you may be able to take the Credit for Elderly or Disabled. If you are under age 65, you must have your physician complete a statement certifying that you had a permanent and total disability on the date you retired. You must also have taxable disability income that meets certain requirements. The Credit is based on your age, filing status, and income.
You may only take the credit if you meet the following:
In 2020, your adjusted gross income (AGI) on Form 1040 (or Form 1040-SR) line 11 must be less than $17,500 ($20,000 if married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).
The nontaxable part of your Social Security or other nontaxable pensions, annuities, or disability income is less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).
3. Retirement Account Limits Increase. Once you reach age 50, you are eligible to contribute (and defer paying tax on) up to $26,000 in 2020 (and in 2021). The amount includes the additional $6,500 “catch up” contribution (2020 and 2021) for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan.
4. Early Withdrawal Penalty Eliminated. If you withdraw money from an IRA account before age 59 1/2, you generally must pay a 10 percent penalty (there are exceptions – call for details); however, once you reach age 59 1/2, there is no longer a penalty for early withdrawal. Furthermore, if you leave or are terminated from your job at age 55 or older (age 50 for public safety employees), you may withdraw money from a 401(k) without penalty. You will, however, still have to pay tax on the additional income.
5. Higher Income Tax Filing Threshold. Taxpayers who are 65 and older are allowed an income of $1,650 more ($2,600 married filing jointly) in 2020 before they need to file an income tax return. In other words, older taxpayers age 65 and older with income of $14,050 ($27,400 married filing jointly)in 2020 or less may not need to file a tax return.
Don’t hesitate to call if you have any questions about these and other tax deductions and credits available for older Americans.
New Year, New Withholding?
Whether you are starting a new job or reassessing your financial situation, a new year often means a fresh start. Why not get the new tax year off to a good start as well?
One way people can do this is by checking their federal income tax withholding using the Tax Withholding Estimator on IRS.gov. This online tool is useful because it helps employees avoid having too much or too little tax withheld from their wages. It also helps self-employed people make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time, while having too much withheld results in less money in your pocket.
Taxpayers can use the results from the Tax Withholding Estimator to determine if they should:
- Complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to their employer.
- Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments and submit it to their payer.
- Make an additional or estimated tax payment to the IRS.
The Tax Withholding Estimator asks taxpayers to estimate:
- Their 2021 income.
- The number of children to be claimed for the child tax credit and earned income tax credit.
- Other items that will affect their 2021 taxes.
The Tax Withholding Estimator does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. Also, the IRS doesn’t save or record the information entered in the Estimator.
Before using the Estimator, taxpayers should gather their 2019 tax return, most recent pay stubs, and any income documents. These documents will help taxpayers estimate 2021 income and answer other questions asked during the process.
Most income is taxable, including unemployment compensation, refund interest, and income from the gig economy and virtual currencies. Therefore, taxpayers should also gather any documents from these types of earnings, such as W-2s, Forms 1099 from banks and other payers, and Form 1099-NEC. Forms 1095-A, Health Insurance Marketplace Statement may also be useful for those claiming the premium tax credit.
As a reminder, the Tax Withholding Estimator results will only be as accurate as the information entered by the taxpayer. People with more complex tax situations, including taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends, should consult a qualified tax professional.
Who Qualifies for the Earned Income Credit
The earned income tax credit can give qualifying workers with low-to-moderate income a substantial financial boost. The credit not only reduces the amount of tax someone owes but may give them a refund even if they don’t owe any taxes or aren’t required to file a return. If you lost your job in 2020 or your earnings were significantly lower, you may qualify for the earned income tax credit; however, taxpayers must meet certain requirements and file a federal tax return in order to receive this credit. Here’s what you need to know:
There’s a new rule this tax season to help people impacted by a job loss or change in income in 2020. Taxpayers can use their 2019 earned income to figure your EITC, if their 2019 earned income was more than their 2020 earned income. The same is true for the additional child tax credit.
Taxpayers qualify based on their income and the filing status they use on their tax return. The credit can be more if they have one or more children who live with them for more than half the year and meet other requirements. As such, a taxpayer’s eligibility for the credit may change from year to year and can be affected by major life changes such as:
- A new job or loss of a job
- Unemployment benefits
- A change in income
- A change in marital status
- The birth or death of a child
- A change in a spouse’s employment situation
Taxpayers who are married filing separately can’t claim EITC.
Those who are working and earned less than these amounts in 2020 may qualify for the EITC:
Married filing jointly:
- Zero children: $21,710
- One child: $47,646
- Two children: $53,330
- Three or more children: $56,844
Head of household and single:
- Zero children: $15,820
- One child: $41,756
- Two children: $47,440
- Three or more children: $50,954
The maximum credit amounts are based on whether the taxpayer can claim a child for the credit and the number of children claimed. For example, the maximum credit for one child is $3,584 and for two children is $5,920.
For more information about this and other tax credits and deductions you might qualify for when you file your tax return this year, please call the office.