February is the right month to start preparing your 2020 taxes, and the DECU Daily blog has tips that can help get you ready to file.
But before you do, let’s take a look at some deadlines.
Taxes are due April 15, and you can request an extension until October 15. If you know that you are going to need more time to do your 2020 tax filing paperwork, your best course of action is to decide now whether to file for an extension. The catch here is that you still must estimate the amount of tax you owe and pay that amount by the regular April 15 deadline in order to avoid penalties.
For those who will file before mid-April, the Internal Revenue Service has a comprehensive, easy-to-use website to help you, and you can use their Interactive Tax Assistant page to determine:
- If you need to file a tax return
- Filing status
- Dependency claim criteria
- Taxable income classification
- Tax credit eligibility
- Expense deduction list
Next, you will need to collect your 2020 tax documents, earnings statements, and any other financial information. Last year’s financial documents can include:
- Your W-2s
- School taxes
- Interest statements
- Receipts for deductible expenses
- Property taxes
- A copy of last year’s return, if applicable
- Form 1099 for taxable interest income of at least $10
Then use the Interactive Tax Assistant to help determine your filing status before you begin to seek the correct tax forms. Here are five common filing statuses:
- Married filing separately
- Married filing jointly
- Unmarried head of household
- Eligible widow or widower with a dependent child
With this info, you are just about ready to start the work on your 2020 tax return. In order to do this, you will need to download some forms, instructions and publications. Here is a list of some of the most common taxpayer forms.
- 1040 – US Individual Income Tax Return
- W-4 – Employee’s Withholding Certificate
- Form 941 – Employer’s Quarterly Federal Tax Return
- Form W-2 – Wage and Tax Statement
- Form 1099 – Wage and Tax Statement for Self Employed
Once everything is in place, you might just be ready to file your 2020 tax returns. But will you do it yourself or will you hire outside help?
The IRS Free File program makes it possible for almost everyone to file electronically and for free on the IRS.gov website or on their IRS2GO app. The software finds deductions, credits and exemptions based on your input and is free for all who earn $72,000 or less in 2020. Beginning in January 2021, IRS Free File offers brand-name tax preparation software for taxpayers to use at no cost.
The Free File partnership with private software companies is free, and they are not allowed to offer you products and services for a fee. Some Free File software packages also prepare state taxes for free as well.
For taxpayers who earned more than $72,000 in 2020, the IRS offers its annual Free File Fillable Forms website for taxpayers from February 12. This software allows taxpayers the ability to:
- Choose your income tax form
- Enter your tax information online
- Electronically sign and file your return
- Print your return for recordkeeping
But Free File Fillable Forms are not available for state tax filing, and the software can only compute basic calculations with limited guidance. Deductions, exemptions, and credits are not automatically classified.
If you have a more complicated tax situation, if you earn at least $200,000 a year, if you’ve gone through a life-changing event in the past year (marriage, divorce, birth, death, etc.) it might be a good idea to hire a tax professional, as most IRS audits are conducted when individual income rises above the $200,000 per year threshold.
Hiring a tax pro might also be necessary if your tax situation is complicated by dependents, assets, investments, and businesses.
Choosing a tax pro for such valuable financial assistance is an important undertaking. For a comprehensive checklist of what to look for and which options are available, see the IRS tip sheet for things taxpayers should remember when looking for professional assistance.
Get Help, Get a Return
For some, filing taxes is a task that cannot be accomplished alone, and so the IRS has stepped in to create programs to assist folks in need. The IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs offer free basic tax return preparation to qualified individuals. The VITA Locator Tool will help you locate an open VITA site near you.
If you qualify for a tax refund and you are expecting money back, there are a few options for taxpayers that you might not know about.
First, the government can send you a paper check in the mail, or they can post the refund directly into your checking or savings account.
If you pay estimated taxes throughout the year, you can apply your 2020 refund towards 2021’s tax bill. All or part of your refund may be directed towards the first quarterly installment this calendar year.
You can also contribute partial or full refund amounts towards a category of personal accounts that are significantly different than savings or checking. For example, you can choose to deposit your 2020 tax refund in your IRA, Health Savings Account or Education Fund, or you can choose to purchase US Savings Bonds through Treasury Direct.
See the button below for the US Federal Government’s website that lets you buy and redeem securities directly from the U.S. Department of the Treasury in paperless electronic form.
Finally, once you are done and dusted with your 2020 taxes, take a moment to store your paper and electronic records and keep all your documentation safe and conveniently accessible. Annual tax returns are important guides for future tax matters and can also be extremely useful when applying for loans in the years to come.