Key tax changes this year could mean bigger tax refunds for many
Many taxpayers will face numerous tax changes to their federal returns this season after the government put in place various incentive provisions to provide financial relief during the pandemic. That could mean a higher tax refund for many this year.
But for those in need of unemployment insurance, they could get a smaller refund if taxes weren't withheld from their benefit payments.
"What is really new this year is COVID," H&R Block chief tax officer Kathy Pickering told Yahoo Money. "It has brought so much uncertainty into almost all taxes."
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Tax returns officially begin Friday, February 12th and the Internal Revenue Service is now accepting returns. Taxpayers have until April 15 to file their 2020 tax returns with the IRS.
Request your stimulus checks
Those who were eligible for a stimulus check but did not receive any or not the full amount can claim this on their tax return as a refund credit. Credit applies to both the first round of stimulus checks sent in the spring of $ 1,200 and the second round of checks sent in January of $ 600.
Taxpayers who have had significant life changes may also want to consider credit. For example, parents who took in a baby in 2019 or 2020 may be able to claim the extra money for dependents.
College students and other young adults may be eligible for payments if your parents did not claim them as dependent on this year's tax return but did so in previous years.
Read More: Do the following if you haven't received your stimulus check
A change in income could also be a reason to take out the loan. For example, if you lost your job or saw a drop in income in 2020, you might be eligible for payment or a larger check than the one you received.
If you were eligible but never received your payment because you changed your address or the IRS did not have banking information on file, you can also request the credit.
If you have received a payment but wish to apply for a higher amount, you will need to list the amount stated in your message 1444 and include it when completing the tax documents Form 1040 or Form 1040-SR. You should have received Message 1444-A for the first payment and Message 1444-B for the second payment in the mail.
If you are not eligible to adjust the stimulus payment, you do not need to complete this part of the return.
(Photo: Getty Creative)
The rule of hindsight
Taxpayers can use their 2019 or 2020 income to determine eligibility for Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). To qualify for the credits, you must have earned an income in 2020. Unemployment benefit is not qualified.
The CTC grants credit of up to $ 2,000 per child under the age of 17. The amount will be reduced for single applicants with income greater than $ 200,000 and for joint applicants with income greater than $ 400,000. The EITC is a loan for low and middle income families. The maximum credit for families with one child is $ 3,584, while for families with two children it is $ 5,920 for the current tax year.
Choosing the higher income year will not necessarily give you higher credit. Therefore, calculate the credit among the various incomes and use the one that offers higher credit. Not only can the credit reduce your tax liability, but it can also increase your refund.
"These are repayable loans," Lewis Taub, accountant and New York director of tax services at Berkowitz Pollack Brant Advisors, told Yahoo Money. "Not only are you reducing your dollar-for-dollar taxes, but if your credit exceeds your tax liability by a certain amount, the IRS will reimburse you."
The tax filing season officially begins on Friday, February 12, and taxpayers have until April 15 to file their tax returns with the Internal Revenue Service. Photo: Getty Images
Unemployment benefits surprised
Given that millions of Americans are getting unemployment benefits this year, many may be surprised that they owe the IRS more taxes than they expected because they didn't withhold or withheld enough. Unemployment benefit counts as earned income and is taxed in the same way.
"People who receive unemployment benefits are cashless and do not put the money aside for unemployment income," said Taub. "They are hit unexpectedly hard when they actually have to pay their tax bill."
Unemployment benefits are only subject to income tax and not to wage tax like the income you receive from your job. While you will pay federal income tax on your unemployment benefits, you might not have to pay the state if you live in any of the nine states that do not have income tax, including Florida, Nevada, and Texas.
"It's still very, very early in the season for us, but we're finding that even people on unemployment income are still getting reimbursements," Pickering said. "It may not be as big as last year, but they are still getting a refund."
Individuals who received unemployment benefits in 2020 should obtain a Form 1099-G from their state. Many states do not post the form, so taxpayers should go to their state website to access the form.
You may also get a higher return this year if you've donated to charity and used the standard deduction.
Taxpayers using the standard withholding can deduct up to $ 300 for charitable donations this filing season. The $ 300 limit applies to both single and shared filers. Typically, only taxpayers who have declared their taxes can make a charitable donation deduction.
"They either wrote a check or gave cash," Pickering said, noting that household donations are not deductible.
If you contributed money through your work, your pay slip is sufficient evidence to receive credit. Otherwise, any receipts the charity gave you to document your donation will suffice.
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In previous years, medical expenses had to exceed 10% of your adjusted gross income to be deductible. In this tax season and in the future, this threshold is 7.5%.
"It's really helpful for people to find themselves. You know, in a difficult year with a lot of medical expenses," Pickering said.
In addition, this season you can renew any funds you have on a Flexible Expense Account for Healthcare or Dependent Care (FSA). You can also extend unused funds from 2021 to 2022. Typically, you'll have to spend those funds by the end of the calendar year or lose those pre-tax dollars permanently.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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