Before we get into a few tax tips, we would be remiss if we didn’t remind you of our upcoming 2021 State of the Union event. Due to the pandemic, we will host this annual event virtually on Friday, February 12th at 12:00 eastern. The event is open to all, but registration is needed. Click here to register or read more details.
An update on tax changes for 2020 and 2021
We finally made it. It was a tense year filled with drama on every front from health to politics. School is changed. Sports are changed. Routines have been upended and life was very different in 2020.
But we made it to 2021! And now it is time for … taxes.
We are not trying to dash any hopes or make things worse than they have been, but if we can share some information now, it may help prevent issues down the line. So, we want to make sure you have clarity on several key things that can impact your taxes for 2020.
First, unemployment benefits are taxable:
Many people received unemployment benefits in 2020 due to the pandemic. These federally issued funds were distributed to help people stay in their house and feed their families. Unfortunately, however, these benefits are also fully taxable. If you had no withholding on your unemployment benefits in 2020, you could be surprised when you get your taxes prepared. Make sure you are aware of this fact and that you have taken precaution should you owe taxes to the federal government.
Tip: Putting money into an IRA can be a great way to reduce taxable income. In some cases, you may be able to completely eliminate your tax liability in a given year by fully funding an IRA. Talk with your tax professional and see what options exist for you.
Second, stimulus payments are an advance on certain tax credits:
Most people got at least one (or two) stimulus payments from the government in 2020. These payments were also meant to help people keep the lights on and pay the bills. While these payments are not taxable as income, they are an advance on certain tax credits you may receive as part of your tax preparation process. Specifically, the stimulus payments could offset the Earned Income Tax Credit (EITC) that many families receive each year. This could mean that any refund you are due could be lower than you expect. Again, talking with a qualified tax professional is a good idea.
Third, changes to contribution limits and standard deduction for 2021:
Not much is changing between 2020 and 2021 for those that are contributing to IRA’s and 401k’s. The annual contribution limit for an IRA of $6,000 (under 50 years old) will remain for 2021. The limit for contributing to a 401k ($19,500) will also remain in effect. And don’t forget that in order to contribute directly to a Roth IRA, you have to make less than $140,000 (single) and $208,000 (married filing joint) respectively. One bright spot is that the standard deduction went up (slightly) to $12,550 for single filers and $25,100 for those that are married filing jointly.
Clearly 2020 impacted every aspect of our lives, taxes included. It is wise to work with a local tax professional to help ensure every box is checked and every line has the right number in it, to prevent the need for corrections with the IRS later.
We hope this helps clarify some changes and assists in avoiding future issues.
P.S. Don't forget to register for our State of the Union webinar. You can do so here.