Millions of Americans took advantage of the delayed tax-filing deadline in 2020. In fact, according to one survey, 11% of taxpayers filed their 2019 returns after the July 15 extension, and 3% still hadn’t filed as of last December. The primary reason most taxpayers file late isn’t due to procrastination, but rather because they owe taxes. Among them, 24% say they don’t have the financial ability to pay and 27% admit they didn’t want to.1
However, the bad news is that even if you file for an extension, you still have to pay your taxes on time, even if you must estimate the amount paid. Any back taxes owed after the filing date starts the clock on interest and penalties.
There are several ways to estimate your taxes and get them paid on time, and good reasons to do so. If you’re a W-2 employee, you can request to have your tax withholding changed at any time during the year to reflect changes in your income. If you’re self-employed, you simply change the estimated tax you pay each quarter to align with recent earnings. It’s better to pay taxes on time than run up a penalty tab that you’d otherwise be saving or spending elsewhere. If you’d like to learn about ways to use insurance products to minimize your tax liabilities, please contact us.
The 2020 tax season has several pitfalls due to the year’s poor economy and measures designed to alleviate its effects. For example, COVID-19 relief programs such as the CARES Act granted forebearance to many Americans carrying student loans and mortgages. Be aware that any amount of debt – including credit card debt – that is forgiven qualifies as taxable income in that year.2
Other income taxpayers must report include termination benefits, such payouts for unused sick days, vacation days or severance pay. Those amounts should be included on the W-2 your former employer provides. Furthermore, unemployment benefits paid by the government also are subject to taxation.3
Speaking of unemployment, it used to be that unemployment benefits would reduce a taxpayer’s eligibility for certain credits, such as the earned income tax credit (up to $6,600), and a refundable portion of the child tax credit (up to $1,400 per qualifying child). However, this issue was adjusted in light of so many people losing income last year. When filing a 2020 return, taxpayers have the option to use 2019 income to calculate their eligibility for tax credits.4
The good news is that if you were eligible for government stimulus checks last year and didn’t receive them, you can claim that money as a Recovery Rebate Credit on your 2020 return. The bad news is that if you are past-due on child support or unpaid student loans, the IRS can withhold some or all of that stimulus credit to offset the debt you owe.5
Our firm assists retirees and pre-retirees in the creation of retirement strategies utilizing investment and insurance products. Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions.
1 Elizabeth Renter. NerdWallet. Feb. 2, 2021. “Tax Bills Drive Millions of Late 2019 Returns and 2021 Stress.” https://www.nerdwallet.com/blog/2021-tax-report/. Accessed March 4, 2021.
2 Kimberly Palmer. 23ABC News. March 3, 2021. “Unwelcome tax surprises may await those with debt.” https://www.turnto23.com/financial-fitness/unwelcome-tax-surprises-may-await-those-with-debt. Accessed March 4, 2021.
3S The Street. Feb. 25, 2021. “5 Tax Tips for When You’re Suddenly Faced with Unemployment.” https://www.thestreet.com/personal-finance/taxes/tax-tips-sudden-unemployment-turbotax. Accessed March 4, 2021.
4 Darla Mercado and Carmen Reinicke. CNBC. Feb. 15, 2021. “This tax pitfall could affect millions due to Covid. Here’s what you need to know.” https://www.cnbc.com/2021/02/15/beware-this-tax-pitfall-if-you-had-unemployment-income-during-covid-.html. Accessed March 4, 2021.
5 Alison DeNisco Rayome and Shelby Brown. CNET. Feb. 25, 2021. “6 stimulus check pitfalls to know about during tax season.” https://www.cnet.com/personal-finance/6-stimulus-check-pitfalls-to-know-about-during-tax-season/. Accessed March 4, 2021.
Ready to Take The Next Step?
For more information about any of the products and services listed here, schedule a meeting today or register to attend a seminar.