The IRS issued a news release on January 27, 2021 to share important reminders for individual tax filers who are getting ready to process their 2020 federal tax returns. Note that the IRS will not begin accepting returns until February 12, 2021. (see related release)
Electronic Filing and Direct Deposit
As the IRS has done in prior years, they are encouraging taxpayers ‒ now more than ever ‒ to file returns electronically and elect direct deposit for any refunds. These methods are the safest and fastest way to process refunds, especially during this unpredictable time. Electronic filing also provides the IRS with your financial account information to more easily facilitate any Economic Impact Payments (stimulus payments) in the future.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) offers a tax break for qualifying workers with low to moderate income. Taxpayers that qualify can use the credit to reduce the taxes they owe or even increase their refunds. Certain requirements based on gross income and filing status must be met in order to receive this credit. The IRS offers an EITC assistant on their website to help people determine if they qualify.
Millions of Americans received unemployment compensation in 2020 due to the COVID-19 pandemic. This compensation is taxable and should be included as gross income on federal tax filings. A Form 1099-G stating the gross compensation, along with any federal taxes withheld, will be issued to taxpayers that received unemployment compensation to include on their 2020 federal tax returns.
Interest Income from the IRS
The IRS issued interest payments in 2020 to many individual taxpayers that were receiving refunds on their 2019 income tax returns due to the extended July 15th deadline. These interest payments are considered taxable and must be reported on the taxpayer’s 2020 federal income tax return. The IRS will send Form 1099-INT to any taxpayer that received $10 or more of interest income.
Home Office Deduction
The home office deduction remains available to certain self-employed taxpayers, such as independent contractors. However, the Tax Cuts and Jobs Act of 2017 suspended this deduction for employees starting in 2018, so even if taxpayers are working remotely, they are not eligible for the deduction if they receive a Form W-2 from their employers.
Charitable Donation for Standard Deduction Taxpayers
Taxpayers who do not claim itemized deductions on their federal tax returns, and instead claim the standard deduction, may also be able to take advantage of charitable contributions for 2020. Under the CARES Act, taxpayers are permitted to take a deduction of up to $150 ($300 for married filing jointly) for cash contributions made to qualifying organizations, in addition to the standard deduction. This deduction only applies to cash contributions, not donated property. The IRS recommends using their Tax Exempt Organization Search tool to confirm that the organization is eligible for tax-deductible donations.
Please note that these reminders are specific to federal income tax filings only. State tax filings do not always conform to federal income tax rules. If you have any questions or need assistance with your individual tax filings, please contact Katie Krizmanich or your GYF Tax Executive at 412-338-9300.