15 Tax Questions Answered

·14 min read

Answers to your tax questions

This is the time of year when people's minds are filled with tax questions -- whether they're searching for free tax help they can trust, trying to squeeze out more valuable deductions, hoping to avoid penalties or an audit, eagerly awaiting their refund, or wanting to make sure they aren't the victim of tax scams. Read on for answers to the most common and popular tax questions that can help you with your return and beyond.

How do I file taxes for free or get free tax help?

Several online tax-filing companies partner with the IRS to offer free tax-filing services through the Free File program for taxpayers below a certain income level ($72,000 in 2020). Some tax software companies also offer free programs that aren't based on income. For example, TurboTax offers a free edition for people with a 1040 return who don't have to file additional schedules, such as for itemized deductions or self-employment income.

You can get personalized tax help for free through the IRS' Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly programs. The VITA program offers free tax help for people who earn $57,000 or less, people with disabilities and those who speak limited English. You can look up free tax-filing assistance program in your area with the Get Free Tax Prep Help tool from the IRS.

Are there ways to get extra tax breaks for the year after Dec. 31?

Yes. You have until May 17, 2021, to make tax-advantaged contributions to several kinds of accounts for 2020.

You can contribute up to $6,000 to an IRA for 2020 or $7,000 if 50 or older. Your contributions may be tax-deductible based on your income and any retirement plan at work. See the IRS' IRA Deduction Limits. Or you can contribute to a Roth IRA, which isn't tax-deductible but grows tax-free, if you're single and earned less than $139,000 in 2020, or $206,000 if married filing jointly.

If you had any self-employed or freelance income, you can make tax-deductible contributions to a Simplified Employee Pension (SEP) or a solo 401(k).

You may be able to make tax-deductible contributions to a health savings account if your health insurance policy in 2020 had a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. HSA contributions are tax-deductible, the money grows tax-deferred, and you can take tax-free withdrawals for health care expenses at any time.

Can my kids contribute to a Roth IRA?

Yes, if they earned any income from working in 2020, they have until May 17, 2021, to contribute to a Roth IRA. It's a great way to build tax-free savings for the future that they can also tap earlier. They can withdraw the earnings tax-free after age 59 1/2, and they can take the contributions at any time without penalties or taxes for any reason -- which can help for a house down payment, car purchase or emergency fund.

They can contribute up to the amount they earned from working for the year, with a $6,000 maximum in 2020. Parents often match their children's contributions to help them get started.

When will my tax refund arrive?

It depends on when and how you filed your tax return. You'll get the money fastest -- usually within 21 days -- if you file electronically and have the refund deposited directly into your bank account. You can include your bank's routing number and your account number on your Form 1040 and can submit Form 8888 with your tax return for direct deposit into several accounts.

It can take much longer if you file a paper return -- usually about two months, and longer if you request a paper check.

You can check on the status of your refund by using the IRS' Where's My Refund tool. Input your Social Security number, your filing status and the exact dollar amount of the refund from your tax return. You can check on the status of your refund 24 hours after e-filing or four weeks after mailing a paper return.

What happens if I can't make the tax-filing deadline?

File for an extension by the tax-filing deadline. Otherwise, if you owe money and miss the deadline, you could get hit with late-filing penalty of up to 5% of the unpaid balance each month, up to a maximum of 25%, and a monthly penalty for failure to pay on time, which is 0.5% of the unpaid taxes. (There's no penalty if you miss the deadline and you don't owe money, but you'll have to wait longer to receive your refund.)

To request an extension for 2020, you must file Form 4868 by May 17, 2021. You'll then have until Oct. 15 to file your return. You don't need to explain to the IRS why you're asking for the extension, but you do need to estimate your tax liability and pay what you think you owe -- the extension is just for filing; not for paying. As long as you pay within 90% of your final tax liability by the tax-filing deadline, you won't get hit with a late-payment penalty.

I've been working from home this year. Can I take the home office deduction?

Only if you're self-employed. After a 2018 tax-law change, employees who work for an employer can no longer deduct home office expenses, even if they spent the year working remotely.

Self-employed people, however, can deduct their home office expenses if they use part of their home "regularly and exclusively" for business. The home office doesn't have to be a separate room, but it has to be an area where you don't do anything else (so not your kitchen table). If you qualify, you can deduct a portion of your rent or mortgage interest, utilities and homeowners or renters insurance, based on the percentage of your home that you use as your home office. Or you can take the simplified option, which is calculated as $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500.

To claim the home office deduction, file Form 8829 Expenses for Business Use of Your Home and report the number on Schedule C with your self-employed income.

Are my unemployment benefits taxable?

The federal government usually taxes unemployment benefits as ordinary income (like wages), although you don't have to pay Social Security and Medicare taxes on that income. But the American Rescue Plan Act of 2021 temporarily changed the rules.

You can exclude up to $10,200 of unemployment benefits from your 2020 federal income taxes if your adjusted gross income was less than $150,000 for the year. The $10,200 exclusion currently only applies to 2020, so you may want to have income taxes withheld from any unemployment benefits you receive this year to avoid a surprise at tax time next year. You can ask to have taxes withheld from your payments when you apply for benefits, or you can file IRS Form W-4V, Voluntary Withholding with your state unemployment office. You can only request that 10% of each payment be withheld from your unemployment benefits for federal income taxes.

Should I itemize or take the standard deduction?

Most people take the standard deduction, which is much larger than it had been in the past. For 2020, the standard deduction for people under 65 is $12,400 for single filers, $18,650 for head of household and $24,800 for married filing jointly. Taxpayers who are 65 or older can claim an extra $1,300 deduction or $1,650 if using the single or head of household filing status.

Itemized deductions are based on certain expenses, such as charitable contributions, mortgage interest, state and local taxes up to $10,000 per year, and medical expenses that are more than 7.5% of your adjusted gross income. If your itemized deductions add up to more than your standard deduction, then you'll file Schedule A to report those deductions rather than taking the standard deduction.

Can I get a tax deduction for charitable contributions?

You usually need to itemize your deductions to get a tax break for charitable contributions, and that benefit is still available for itemizers. But people who take the standard deduction can still get a tax benefit for charitable contributions for 2020. The Coronavirus Aid, Relief and Economic Security Act lets taxpayers deduct up to $300 in charitable contributions in 2020, even if they don't itemize. To qualify for that deduction, your gift must be made in cash (not appreciated stock or other assets) and must go directly to the charity, not to a donor-advised fund.

What are some of the most frequently overlooked tax breaks?

The retirement savers' tax credit can be worth up to $1,000 per person ($2,000 for couples). To qualify, you need to contribute to a 401(k), IRA or other retirement savings plan and meet the income limits -- for 2020, you must have earned less than $65,000 if married filing jointly, $48,750 if filing as head of household or $32,500 if single.

The child care tax credit can be worth up to $1,050 for one child or $2,100 for two or more. To qualify, you must have children under age 13 and pay for child care while you and your spouse work or look for work. The cost of day care, a nanny, preschool, before and after school care and even summer day camp count toward the credit, which can be worth 20% to 35% of up to $3,000 in child care expenses for one child, or up to $6,000 in expenses for two or more, based on income.

What can I do if I discover I missed some deductions after I file my tax return?

You generally have up to three years after the tax-filing deadline to file an amended return if you left something out or realize you made a mistake. File form 1040X with the changes and also submit any additional forms that are affected by the change. If you claim additional deductions or credits, you can get an extra refund.

In the past, you could only file an amended return on paper, but you can now file an amended return electronically for 2019 and 2020 returns that were originally e-filed (2018 amended returns must still be on paper). You can check on the status of your amended return and refund using the IRS' Where's My Amended Return? tool.

What tax records do I need to keep and what can I toss?

It's a good idea to keep your tax returns (or a digitized copy) forever. You need to keep records reporting your income, expenses and deductions for at least three years after the tax-filing deadline, which is the length of time the IRS generally has to initiate an audit. You may want to keep the records for at least six years if you have self-employed income from a variety of sources -- that is how long the IRS has to initiate an audit if you omit 25% or more of your income. Some states have different time frames for audits.

Keep some records for longer -- keep records of stock and mutual fund purchases you make in a taxable account as long as you own the investment; keep records of significant home improvements until you sell your home. Keep records of nondeductible IRA contributions until you withdraw all of the money from the account.

What are some red flags that can trigger a tax audit?

You may hear from the IRS if you didn't report all of your income. The IRS receives copies of your W-2 and 1099 forms reporting income, and will ask about discrepancies if the numbers on your return don't match the information it received. You may also hear from the IRS if you reported business losses for several years in a row or if your business had unusually large expenses. If you contribute $250 or more to a charity, you need a letter from the charity documenting the gift by the time you file your tax return; there are additional recordkeeping requirements for some larger gifts.

Double check that you've included your Social Security number, signed your return and haven't made any math errors before you file. Keep records documenting your expenses and deductions for at least three years after the tax-filing deadline so you're prepared to make your case if you do hear from the IRS.

Should I file a tax return if I'm a college student?

It depends on your income and whether you had taxes withheld from your paychecks. Students who are single and earned more than the $12,400 standard deduction in 2020 are required to file an income tax return. The $12,400 includes income from earned income (from a job) and unearned income (such as from investments). They must also file a return if their unearned income (such as unemployment compensation, interest and dividends) is greater than $1,100 or their self-employment income is greater than $400.

You may want to file a return even if you aren't required to do so if income taxes were withheld from your paychecks -- in that case, you can file a return and get money back in a refund.

How can I avoid tax scams?

Beware of any calls or e-mails claiming to be from the IRS -- the IRS will send you a letter if it has questions or issues with your return. Choose a tax preparer carefully -- the information on your income-tax return can be a treasure trove for ID thieves. Tax preparers must have an IRS Preparer Tax Identification Number and must sign your return with the number. Never sign a blank tax return. You can look up the credentials of tax preparers in your area with the IRS Directory of Federal Tax Return Preparers. Find out how you can reach the preparer after the tax deadline in case you hear from the IRS with questions.

See the IRS' Tax Scams/Consumer Alerts for more information about protecting yourself from the most recent tax scams.

The most common tax questions:

-- How do I file taxes for free or get free tax help?

-- Are there ways to get extra tax breaks for the year after Dec. 31?

-- Can my kids contribute to a Roth IRA?

-- When will my tax refund arrive?

-- What happens if I can't make the tax-filing deadline?

-- I've been working from home this year. Can I take the home office deduction?

-- Are my unemployment benefits taxable?

-- Should I itemize or take the standard deduction?

-- Can I get a tax deduction for charitable contributions?

-- What are some of the most frequently overlooked tax breaks?

-- What can I do if I discover I missed some deductions after I file my tax return?

-- What tax records do I need to keep and what can I toss?

-- What are some red flags that can trigger a tax audit?

-- Should I file a tax return if I'm a college student?

-- How can I avoid tax scams?

Kimberly Lankford has been a financial journalist for more than 20 years. As the "Ask Kim" columnist at Kiplinger's Personal Finance Magazine and Kiplinger.com, she received hundreds of reader questions every month about insurance, taxes, retirement planning and other personal finance issues. Her financial articles have also appeared in the Washington Post, Boston Globe, Chicago Tribune, Bloomberg Wealth Manager, Military Officer magazine and many local newspapers.

She received the personal finance Best in Business Award from the Society of American Business Editors and Writers, and she has written three books: "Rescue Your Financial Life," "The Insurance Maze" and "Ask Kim for Money Smart Solutions." She also wrote the "Financial Field Manual: Kiplinger's Personal Finance Guide for Military Families," which has been reprinted in three editions and is distributed to servicemembers at military bases throughout the world. Kim has been featured as a financial expert on NBC's Today Show, CBS This Morning, CNN, CNBC, Fox News, National Public Radio, PBS and many local radio and TV stations. Her website is www.kimberlylankford.com.