No one looks forward to filing their income taxes. And 2020 was, to put it lightly, a vastly different tax year.
However, there’s some good news. The Internal Revenue Service (IRS) announced the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021.
There is one caveat, however. The IRS notes the extended deadline only pertains to federal income tax payments. In response, a lot of states have followed suit and extended their deadlines—however, some are still April 15, or they might have different dates altogether. (So be sure to double check your state’s income tax deadline.)
This extra time may give many folks a small sense of relief. With the various bills and stimulus packages enacted, American taxpayers are staring at a long list of tax changes for the 2020 tax year.
Here are four specific issues to consider when filing your taxes this year…
1. Unemployment Income
Last year was particularly disruptive, of course, so you (or your spouse) may have received unemployment income, which is a taxable item on the federal level—and in most states as well. If you received payments and didn’t either put money aside or choose to have taxes withheld, you may have a bigger tax bill than expected.
But help is on the way. Congress just passed the $1.9 trillion American Rescue Plan—the law waives federal income taxes on up to $10,200 in unemployment insurance benefits for people who earn under $150,000 a year, potentially saving workers thousands of dollars. States that currently tax unemployment benefits have yet to decide whether they will allow those state taxes to be waived as well.
However, the fact that the tax law was changed a month after the IRS started accepting taxes promises to further complicate an already challenging filing season.
2. Stimulus Payments
As for those stimulus payments? Those were actually refundable tax credits, meaning that they applied directly against what you would owe in taxes and were refundable. So, if you paid enough in taxes, you got the money. And although some individuals or couples were not eligible for full (or any) stimulus payments based on their 2019 income, a 2020 income loss might mean they now qualify and could claim the balance on their taxes.
3. Medical Deductions
If you found yourself with hefty medical bills last year, you might be able to find at least some tax relief.
You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. For example, if your AGI was $100,000, you can deduct out-of-pocket medical expenses beyond $7,500 in 2020. But you have to itemize your deductions in order to write off those expenses on your tax return.
4. Your TSP and Other Retirement Accounts
The CARES Act allowed folks under the age of 59½ to take up to $100,000 out of their Thrift Savings Plan (TSP), 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty. However, the money you take out of these tax-deferred retirement accounts will be taxed as ordinary income, so get ready to pay taxes on any withdrawals you made.
With your TSP, you have to take money out of your account once you reach a certain age—i.e., required minimum distributions (RMDs). The good news is the SECURE Act pushed back the age for RMDs from 70½ to 72. On top of that, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. That’s huge, because it could lead to significant tax savings for retirees with those accounts since the money that’s taken out of your TSP counts as taxable income.
Decide Whether to DIY or Work with A Professional
Are you going to file taxes on your own or hire professional help? Don’t wait until April to make this decision — it’s likely you won’t find many tax preparers willing to work with you that late in the game.
If your taxes are pretty straightforward, there are plenty of programs available to help make filing on your own simple. Many seniors and retirees on fixed incomes can file their taxes for free. Free File is one of several ways that older taxpayers can save money and file their taxes.
But if you have a more complicated tax situation or had a crazy year in 2020, working with a tax professional is probably a smart move. So, if you’re planning to hire help, now is a great time to find the right person.
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ABOUT THE AUTHOR:
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she and her team empowers employees to make confident decisions as they plan for the days when they no longer have to work.
As the developer of dozens of highly-regarded retirement planning materials for federal employees and the creator of the FedImpact Webinar and the FedImpact Podcast, Chris has also analyzed the challenging retirement scenarios for thousands of federal employees – helping them to avoid costly mistakes, and highlighting opportunities for them to gain greater financial security in their retirement years.
Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement. After all, if what you thought was true wasn’t, when would you like to know?