It seems that almost every aspect of our professional and financial lives have been affected by the pandemic of 2020—and our taxes are no exception. After a year of roadblocks, overhauls, and adaptations, we get to cap it all off with sorting and filing 2020 taxes.
The pandemic and our government’s measures to account for its far-reaching financial effects, have accounted for recent changes to filing your 2020 taxes. Specifically, the CARES Act has implications for your 2020 tax proceedings that you should take special care to prepare for.
The good news: these measures were put in place to ensure that small businesses and professionals who were hit especially hard by the economy shut-down receive additional relief; However, the bad news: these new measures potentially complicate an already complicated process. Take a deep breath; you’ve got SageSpring Wealth Partners on your side, ready to offer guidance.
Consider taking these five steps prior to Tax Day 2021 to help you feel prepared.
1. Evaluate Your Pandemic-Related Financial Aid
Several financial relief options were available to small businesses and out-of-work professionals throughout 2020, especially during the initial months of the economic shut-down. The most common forms of financial relief include:
- Stimulus Checks—Although they will not count as taxable income, stimulus checks will affect your refund.
- Paycheck Protection Program (PPP) Loans—Can be deducted from your taxable income, but you must first complete a loan forgiveness application.
- Unemployment Benefits—If you did not choose for taxes to be withheld from your benefits, you will need to account for this.
Many of us held our breath as we accepted many of these forms of financial relief, fearing the potential mess they might make of our taxes at the end of the year, but with the proper organization and preparation prior to filing, you can overcome this hurdle.
2. Review New Coronavirus Tax Credits
If you are a small business owner who can prove that your business was negatively impacted by the pandemic, there is a tax credit available to you.
If you did not receive or only received a partial Economic Impact Payment (i.e., a stimulus check), then you may qualify for the Recovery Rebate Credit on your 2020 tax return. The Economic Impact Payments were based on 2018 and 2019 tax returns, however the Recovery Rebate Credit is based on your 2020 tax information. To understand whether you qualify for this credit, you must have the following information available:
- The amount of money you received from the Economic Impact Payments (if any)
- Any IRS notifications you received via mail regarding your Economic Impact Payments
- Forms 1040 and or 1040-SR
3. Study Changes to Income Tax Brackets
As we mentioned, the pandemic has had an effect on the 2021 tax season. One example being that tax brackets and the standard deduction were both adjusted to account for inflation.
We suggest reviewing these numbers, in comparison with your 2019 returns, so that you can anticipate how these changes will affect you—eliminating confusion as you are confronted with these new figures.
4. Organize Your Anticipated Deductions
This step is an important part of filing your taxes every year, however, taking the time and forethought this year to gather all documents and numbers regarding your tax deductions will be pivotal to a timely and streamlined filing process.
You should take special care to organize all documented proof of the following:
- Medical Deductions—Medical-related expenses were rampant in 2020, whether it was from COVID-19 illness or the transition to telehealth subscriptions.
- Charitable Deductions—There were many new opportunities to donate to charitable causes for COVID-19 relief; your contributions can add up quickly and provide substantial benefits.
- Business Deductions—With the influx of work-from-home transitions over the last year, it’s important to prepare all expenses related to this lifestyle change ahead of filing.
5. Tax-Planning for 2021
After preparing all documentation, reviewing the numbers, and anticipating the return results, maybe you aren’t satisfied or even greatly disappointed with the results. The remedy? Start planning for next year…immediately. Now is the time to implement year-round tax planning.
We are here to listen to your concerns and help you develop a plan to move forward in tackling the next fiscal year with confidence.
Need assistance with financial planning?
SageSpring Wealth Partners offers financial guidance and education. While you should always discuss any tax or legal matters with the appropriate professional, feel free to contact us today to learn how we can help you to collaborate with your tax, legal, and other professionals, if and when necessary.
