Click on the links below to jump to each section in this article:
- File on Time – Even if You Can’t Pay
- Common Errors To Avoid When Filing a Tax Return
- Refunds for Nontaxable Unemployment Compensation
- Recovery Rebate Credit May Be Different Than Expected
- Deductions for Food or Beverages From Restaurants
File on Time – Even if You Can’t Pay
Generally, taxpayers should file their tax returns by the deadline even if they cannot pay the full amount due, but if you can’t, there are several options. Let’s take a look at a few scenarios:
1. An individual taxpayer owes taxes, but can’t pay in full by the deadline. If this is the case, file a tax return or request an extension of time to file by the May 17 deadline. If tax is owed and a return is not filed on time – or an extension is not requested – the taxpayer may face a failure-to-file penalty for not filing on time.
Taxpayers should remember that an extension of time to file is not an extension of time to pay. An extension gives taxpayers until October 15, 2021 to file their 2020 tax return, but taxes owed are still due May 17, 2021.
2. File an extension. To file an extension, taxpayers must do one of the following:
- File Form 4868, Application for Automatic Extension of Time, through their tax professional
- Submit an electronic payment with Direct Pay, Electronic Federal Tax Payment System or by debit, credit card or digital wallet and select Form 4868 or extension as the payment type.
3. Set up a payment plan as soon as possible. Taxpayers who owe money but cannot pay in full by May 17 don’t have to wait for a tax bill to set up a payment plan. Instead, they can:
- Apply for a payment plan on IRS.gov; or
- Submit a payment plan request using Form 9465, Installment Agreement Request
4. Pay as much as possible by the May 17 due date. Whether filing a return or requesting an extension, taxpayers must pay their tax bill in full by the May deadline to avoid interest and penalties. People who do not pay their taxes on time will face a failure-to-pay penalty. The IRS has options for taxpayers who can’t afford to pay taxes they owe.
Don’t wait. If you need assistance filing a tax return for 2020, please call the office as soon as possible.
Common Errors To Avoid When Filing a Tax Return
While not all mistakes on tax returns cause delays in refunds, some do. As the May 17 deadline approaches, it pays to steer clear of the ten tax return errors listed below.
1. Not using electronic filing. While this isn’t necessarily a mistake per se, electronic filing is the best way to cut the chances for many tax return mistakes while maximizing deductions to reduce the amount of tax owed. The reason for this is that the tax software your tax professional uses automatically applies the latest tax laws, checks for available credits or deductions, does the calculations, and asks taxpayers for all required information.
2. Failing to report all taxable income. Be sure to have income documents on hand before starting the tax return. Examples are Forms W-2, 1099-MISC, or 1099-NEC. Underreporting income may lead to penalties and interest.
3. Using Incorrect names and Social Security numbers. Enter each Social Security number (SSN) and individual’s name on a tax return exactly as printed on the Social Security card. Persons generally must list the SSN of any person they claim as a dependent on their individual income tax return. If a dependent or spouse does not have and is not eligible to get an SSN, list the Individual Tax Identification Number (ITIN) instead of an SSN.
4. Not using the correct filing status. If taxpayers are unsure about their filing status, the Interactive Tax Assistant on IRS.gov can help them choose the correct status, especially if more than one filing status applies. Tax software, including IRS Free File, also helps prevent mistakes with filing status.
5. Forgetting to answer the virtual currency question. The 2020 Form 1040 asks whether at any time during 2020, a person received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. If a taxpayer’s only transactions involving virtual currency during 2020 were purchases of virtual currency, they are not required to answer “yes” to the question.
6. Mailing paper returns to the right address. Paper filers should check the right address for where to file on IRS.gov or on the form instructions to avoid processing delays. Note that due to staffing issues related to COVID-19, processing paper tax returns could take much longer than usual. Taxpayers and tax professionals are encouraged to file electronically if possible.
7. Not using the correct routing and account numbers. Requesting direct deposit of a federal refund into one, two, or even three accounts is convenient and allows the taxpayer access to his or her money faster. Make sure the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account. Taxpayers can also use their refund to purchase U.S. Savings Bonds.
8. Forgetting to sign and date the return. If filing a joint return, both spouses must sign and date the return. E-filers can sign using a self-selected personal identification number (PIN).
9. Failing to keep a copy of your return. When ready to file, taxpayers should make a copy of their signed returns and all schedules for their records.
10. Not requesting an extension, if needed. Taxpayers who cannot meet the May 17 deadline can easily request an automatic filing extension to October 15 and prevent late filing penalties. Keep in mind that while an extension grants additional time to file, tax payments are still due May 17.
Refunds for Nontaxable Unemployment Compensation
The IRS is automatically refunding money to eligible people who filed their tax returns reporting unemployment compensation before the recent changes made by the American Rescue Plan.
Typically, when an individual receives unemployment compensation, it is taxable. However, under a recent law change (American Rescue Plan), taxpayers who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income, which means they don’t have to pay tax on some of it.
People who are married and filing joint returns can exclude up to $20,400 – up to $10,200 for each spouse who received unemployment compensation. All other eligible taxpayers can exclude up to $10,200 from their income.
This law change occurred after some people filed their 2020 taxes. Eligible taxpayers who filed and figured their 2020 tax based on the full amount of unemployment compensation will automatically receive a refund. The IRS expects to begin issuing these refunds in May.
What You Need to Do
There is no need to do anything. The IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.
The recalculations will take place in two phases:
- First, taxpayers who are eligible to exclude up to $10,200.
- Second, those married filing jointly who are eligible to exclude up to $20,400, and others with more complex returns.
When to File an Amended Return
Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return. For example, the IRS can adjust returns for taxpayers who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.
However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. If they now qualify for these credits, they should consider filing an amended return to claim this money. These taxpayers may want to review their state tax returns as well.
Taxpayers who haven’t yet filed and choose to file electronically simply need to respond to the related questions when preparing their tax returns. For those who choose to file a paper return, instructions and an updated worksheet about the exclusion are also available.
Don’t hesitate to contact the office with questions. As always, help is just a phone call away.
Recovery Rebate Credit May Be Different Than Expected
Some taxpayers who claim the 2020 Recovery Rebate Credit (RRC) on their 2020 tax returns are discovering that they may be getting a different amount than they expected. Let’s take a closer look at why this is happening.
The first and second Economic Impact Payments (EIP) were advance payments of the 2020 credit. Most eligible taxpayers already received the first and second payments and shouldn’t (and don’t need to) include this information on their 2020 tax return. However, those who didn’t receive a first or second EIP or received less than the full amounts may be eligible for the 2020 RRC. However, to claim the credit, they must file a 2020 tax return – even if they don’t usually file a tax return.
How the Rebate Recover Credit Works
When it processes a 2020 tax return claiming the credit, the IRS determines the eligibility and amount of the taxpayer’s credit based on the 2020 tax return information and the amounts of any EIP previously issued. If a taxpayer is eligible, the credit is reduced by the amount of any EIPs already issued to them.
- If there is a mistake with the credit amount (Line 30 of the 1040 or 1040-SR), the IRS will calculate the correct amount, make the correction and continue processing the return.
- If a correction is needed, there may be a slight delay in processing the return, and the IRS will send the taxpayer a letter or notice explaining any change.
Taxpayers who receive a notice saying the IRS changed the amount of their 2020 credit should read the notice and review their 2020 tax return. Taxpayers who disagree with the IRS calculation should review their letter as well as the questions and answers for what information they should have available when contacting the IRS.
Common reasons that the IRS corrected the credit are as follows:
- The individual was claimed as a dependent on another person’s 2020 tax return.
- The individual did not provide a Social Security number valid for employment.
- The qualifying child was age 17 or older on January 1, 2020.
- Math errors relating to calculating adjusted gross income and any EIPs already received.
Don’t hesitate to call if you have any questions about this topic.
Deductions for Food or Beverages From Restaurants
Beginning January 1, 2021, and extending through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided, and the expense is not lavish or extravagant under the circumstances.
In most tax years, there is a 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception was included in the Taxpayer Certainty and Disaster Relief Act of 2020, part of a series of tax laws intended to provide coronavirus-related relief.
Where can businesses get food and beverages and claim 100%?
Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. However, restaurants do not include businesses that primarily sell pre-packaged goods, not for immediate consumption, such as grocery stores and convenience stores.
Additionally, an employer may not treat certain employer-operated eating facilities like restaurants, even if a third party operates these facilities under contract with the employer.
For more information about this and other coronavirus-related tax relief for business owners, please contact the office today.