What to Know About Filing Taxes
There's no question that 2020 was an unusual year, and your taxes may be different, too. If your income was lower than usual or you did any freelance work, you may qualify for benefits you weren't eligible for in the past. You may also be able to get more money in stimulus payments if your income dropped or you had a baby in 2020. And some people who received unemployment benefits may have a tax surprise coming.
"Many people do not realize that federal tax is not automatically withheld from unemployment benefits," says Brittany Benson, senior tax research analyst at the Tax Institute at H&R Block. "As a lot of people faced unemployment for the first time last year, there will be a lot of questions and potential mistakes when they file."
You may have special issues this year, even if your taxes are usually simple, but new resources make it easy to get help with tax questions and filing. Here's what you need to know about filing taxes for the unique year of 2020.
How to File Taxes
There are several ways to file your taxes. You can do them yourself, use tax software or an online program, visit a tax preparer in person or virtually or get help from a certified public accountant or enrolled agent. There are many levels of support and costs depending on the complexity of your situation.
If your adjusted gross income was $72,000 or less, you can file your 2020 federal income taxes for free through IRS Free File. With this program, several online tax preparation companies, such as TurboTax, partner with the IRS to offer free tax-filing services.
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, says Lisa Greene-Lewis, a CPA and tax expert with TurboTax. People who claim the earned income tax credit, the child tax credit and unemployment income can still use the free version, she says.
TurboTax also has several other levels of tax-filing software and costs, such as a $70 Premium option for people with investments or rental property or a $90 software for people with self-employed income. You can also sign up for a service that lets you ask questions to a CPA or enrolled agent anytime during the year, which generally adds $50 to $80 to the cost.
[Read: Married Couples: Should You File Jointly or Separately?]
TurboTax also introduced a full-service option this year, which generally costs from $100 to $260, where you can download your paperwork and a CPA or enrolled agent will complete the return for you. H&R Block's tax preparers are also working in person and virtually. The services generally start at $69 for a federal return, plus more depending on the complexity and forms.
You can also find a licensed tax preparer, a CPA or enrolled agent on your own. Enrolled agents are federally licensed tax preparers who are authorized to represent taxpayers in front of the IRS. You can find an enrolled agent through the National Association of Enrolled Agents. CPAs must complete rigorous education, testing and continuing education requirements. You can find a CPA near you through the American Institute of CPAs search tool. CPAs who have the personal financial specialist credential also have expertise putting taxes into a financial planning perspective.
"A qualified tax and financial advisor may offer more than just short-term tax advice," says Michael Trank, a CPA and PFS in Irvine, California. "They may address holistic issues such as preparation for retirement, planning and saving for important goals, maintaining retirement lifestyle and estate planning objectives with consideration for family dynamics, tax efficiencies and risk tolerances."
When Can You File Your Taxes?
The IRS will start accepting 2020 returns on Feb. 12, which is two weeks later than usual. You should wait until you receive your key forms to file, such as your W-2 from your employer and any 1099 forms reporting earnings from other sources, such as interest, dividends, self-employment and unemployment compensation. Most of these forms must be sent by Jan. 31, although brokerage firms have until Feb. 15 to send some 1099s.
When Are Taxes Due?
Your federal income taxes are due April 15, 2021, but your state income taxes may have a different deadline. For example, Virginia income taxes are due on May 1.
The earlier you file, the sooner you can get your refund and the less likely that an identity thief will claim it before you do. Most people receive their refunds within 21 days of filing, although it can take longer if you're claiming the EITC or the additional child tax credit. You'll usually get your refund fastest if you file electronically and have your refund deposited directly into your bank account. You can check on the status of your refund after you file with the IRS' Where's My Refund? tool.
What if I Miss the Filing Deadline?
It depends on whether or not you owe money. If you don't owe money, then there's no penalty for missing the tax-filing deadline, but you need to file a return to get your refund. "There's technically no penalty," says Steven Hamilton, an enrolled agent with Hamilton Tax and Accounting in Grayslake, Illinois. "But you have to file within three years of the due date on the return or you lose out on your refund."
The situation is very different if you owe the IRS. In that case, you could face two penalties. "The penalty for not filing a tax return is potentially 10 times greater per month than the penalty for not paying in full," says Benson. The late-filing penalty is up to 5% of the unpaid balance each month, up to a maximum of 25%, and the monthly penalty for failure to pay on time is 0.5% of the unpaid taxes. "For example, for someone who owes $1,000, the failure-to-pay penalty starts at $5 per month, but the penalty for failing to file a return starts at $50 per month," says Benson.
How Do I Get a Tax Extension?
If you can't make the April 15 deadline, then you can file IRS Form 4868 for an extension, which pushes your tax-filing deadline forward six months to Oct. 15. Some people file an extension because they run out of time to gather their tax records or they're waiting to receive some tax forms.
"Some people routinely file for an extension because they're waiting for a Schedule K-1 from a partnership, S corporation or trust," says Mary Kay Foss, a CPA in Walnut Creek, California. "Whoever is responsible for providing the Schedule K-1 should give them an estimate of the income to be reported in enough time so the extension payment can be calculated."
Even though you can receive a six-month extension to file, the money you owe is still due by April 15. "A lot of people think an extension is an extension to pay as well, but it's only an extension to file," says Greene-Lewis. "At least pay 90% of what you owe by April 15 to avoid any penalties." If you can't pay the full amount, try to file and pay what you can, and you can work with the IRS to pay through an installment agreement, she says.
Find out if you need to file a separate form for an extension on your state income taxes.
How Much Do I Have to Make to File Taxes?
You generally have to file a federal income-tax return if your gross income exceeds the standard deduction. For 2020, the standard deduction 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.
Dependents must generally file a return if they have unearned income over $1,100 or gross income over $12,400, says Benson.
Your state may have different filing requirements.
You may still want to file an income tax return even if you aren't required to do so. For example, you could get a refund if your employer withheld taxes from your paychecks or you qualify for the EITC even if you earned less than the filing requirement. "The IRS reports that they have over $1 billion in unclaimed refunds every year," says Greene-Lewis. "The average refund owed is for over $800, and it doesn't hurt to file." You have up to three years after the tax-filing deadline to file a return and get back a refund.
Also, even though stimulus payments aren't taxable, if you qualified for a stimulus payment in 2020 but hadn't received it yet -- or qualified for more than you received -- you could get extra money by filing an income tax return. "You could receive an additional stimulus payment, in the form of a recovery rebate credit, if your circumstances changed -- for example, if you had a baby, lost your job and collected unemployment, or your salary changed from 2019," says Benson. "An additional payment would be added to your refund or reduce your balance due."
Filing an income tax return also starts the clock ticking on the statute of limitations for the IRS to initiate an audit, which is generally three years from the tax-filing deadline or, if later, three years from the date you filed your return. "If you don't file a tax return, the statute of limitations doesn't start," says Hamilton.
[Read: What's My Tax Bracket?]
How Do I Get Help With a Tax Audit?
If you worked with an enrolled agent or CPA, let them know about the audit -- they should be able to help and can represent you in front of the IRS. If you filed your return through a tax preparer or software service, they may be able to help, too. For example, you can sign up for TurboTax's audit defense program when you file your taxes for an extra fee.
Enrolled agents often specialize in audits and complex tax-filing situations. "We have 25 to 50 audit cases open at any time, and they're referred to us throughout the year," says Hamilton. "If you're audited, reach out to an accountant -- you have a right to representation."
How Long Should I Keep Tax Records?
"People should keep the returns themselves forever," says Foss. "The supporting records can be shredded earlier." Many tax experts recommend keeping your tax returns or a digitized copy for an unlimited amount of time -- they can be helpful later on if you apply for a mortgage or disability insurance, or you need to prove your income for your Social Security record or show how much you've made in tax-deductible contributions to your retirement savings through the years.
You need to keep your supporting documents for at least three years after the tax-fiing deadline, which is the length of time the IRS generally has to initiate an audit. That timeframe rises to six years if you omit 25% or more of your income, which may be more likely to happen if you have self-employment income from several sources. "I usually recommend that people keep the supporting documents for seven years after filing," says Foss. And you need to keep some records for longer. "Records related to the purchase or improvement of an asset like a personal residence or marketable security should be kept until seven years after the asset is sold," she says.
Some states have a different time frame for initiating an audit.
How Should I Pay My Taxes?
If you owe money, you have several options. You can write a check, pay the money directly from your bank account or use a credit card or debit card. If you can't pay the full amount by the deadline, you can apply for an installment agreement.
"If a taxpayer cannot pay their federal tax liability by the due date but can pay within 120 days or less, they may request a short-term payment plan online or by phone," says Trank. "There is no setup fee, but interest and penalties will be charged on unpaid balances until paid."
If a taxpayer needs more than 120 days, they may request an installment plan either online or by filing Form 9465 Installment Agreement Request. There is a one-time setup fee that varies from $31 to $225 depending on whether you apply online, by phone or mail and how the tax will be paid, he says.
When Are State Taxes Due?
Most states also have state income taxes. State income-tax returns are generally due by April 15, too, although some states have different deadlines. You may be eligible for Free File for your state income taxes based on your income, or you can use software, a CPA, enrolled agent or tax preparer for these taxes, too. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don't have individual income taxes. New Hampshire and Tennessee have no individual income tax, but they do tax some dividend and interest income.
What Happens if I Forgot to Take a Deduction When I Filed?
You generally have up to three years from 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.
[Read: Ways to Save Money on Your Taxes This Year.]
Common Tax Terms to Know
-- Standard deduction: The standard deduction is the amount that you can deduct regardless of your expenses. 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: These deductions are based on certain expenses, such as charitable contributions, mortgage interest and 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 instead of taking the standard deduction.
-- Tax deduction: A tax deduction reduces your taxable income. For example, you may be able to deduct traditional IRA and health savings account contributions. You may also be able to deduct up to $300 in charitable contributions made in cash in 2020 if you don't itemize.
-- Tax credit: A tax credit reduces your tax liability. A $300 credit, for example, can reduce your tax liability by $300. A nonrefundable tax credit can provide a refund only up to the amount you owe. A refundable tax credit provides a refund even if it's more than what you owe. Some common tax credits include the American Opportunity Credit and Lifetime Learning Credit for education expenses, the child tax credit and the dependent care credit.
-- Withholding: This usually refers to the amount of money that employers take out of employees' paychecks to cover federal income taxes, state taxes and other obligations. You can also have taxes withheld from a pension, unemployment benefits or Social Security benefits.
-- W-4: This is the IRS form you submit to let your employer know how much money to withhold from your paycheck for taxes. It's a good idea to run your numbers through the IRS' withholding estimator and then adjust your W-4 with your employer so you don't have a large bill due at tax time. If you received a large refund, adjusting your W-4 to reduce your withholding could help you receive more money in your paychecks instead.
-- W-2: This form reports to the IRS your annual wages and the amount of taxes withheld from your paychecks for federal and state income taxes.
-- 1099: These forms report other kinds of income, such as self-employed or freelance income, dividends, interest and unemployment benefits.
-- Schedule C: This is the tax form you usually need to file if you have income from self-employment. You report your income and can deduct business expenses on this form.
-- Tax return: A tax return is the form you file that outlines your income, expenses, deductions, credits and other tax-related information to the IRS or your state department of revenue.
-- Tax refund: This is the money returned to you when your tax liability is less than the amount you paid through the year, either through withholding or estimated taxes.
