With the April 15 tax filing deadline right around the corner, here are answers to some common tax questions.
- When will I get my refund? The pandemic and additional stimulus payments will, in all probability, delay refund payments. But as of now here are the old wait times to receive your refund.
* E-file return with a direct deposit – 1 to 3 weeks
* E-file return with a mailed check – 1 month
* Paper file return with a direct deposit – 3 weeks
* Paper file return with a mailed check – 2 months
NOTE: If you want exact information on the status of YOUR refund go to www.irs.gov/refund and follow their instructions.
- What’s the most common delay in completing a tax return? Missing items! W-2 and 1099 forms are some of the most common tax documents to go missing. If you have multiple jobs, whether full-time or part-time, you’ll be getting multiple documents in the mail. It’s easy to lose track of all these documents if you don’t have one place you put them once received.
- Can I still get a stimulus payment? If you’re still waiting on either the 2020 or 2021 stimulus payment, file your 2020 tax return and claim the Recovery Rebate Credit. This is why it is important to keep track of any payments you receive from the government during the year. You will need them to account for any missing payments or underpayments.
- Can I correct a tax form that has an incorrect dollar amount? If you receive a tax document with incorrect information, contact the company that issued the document and try to get it fixed immediately. If you can’t get a corrected form right away, include both the incorrect form and the correct dollar amount when turning in your tax documents to have your return prepared.
- Can I deduct charitable contributions if I don’t itemize? In 2020 you can claim a $300 charitable contribution deduction regardless of whether or not you itemize your deductions. If you missed this window of this above-the-line donation in 2020, never fear as it is also available in 2021 with an increased limit to $600 for married couples. So, save those donation receipts!
- Is this taxable? While there are always exceptions, the most common taxable items that are questioned include unemployment benefits and withdrawals from non-Roth retirement accounts. Some things, like Social Security, are often, but not always, taxable.
No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of unpleasant tax situations you could find yourself in and what to do about them.
- An expected refund turns into a tax payment. Nothing may be more deflating than expecting to get a nice tax refund and instead being met with the reality that you actually owe the IRS more money.
What you can do: Run an estimated tax return and see if you may be in for a surprise. If so, adjust how much federal income tax is withheld from your paycheck for the balance of the year. Consult with your company’s human resources department to figure out how to make the necessary adjustments for the future. If you’re self-employed, examine if you need to increase your estimated tax payments due in January, April, June and September.
- Getting a letter from the IRS. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits. The IRS assumes their figures are correct and will demand payment for the taxes you owe on the amount of income you omitted on your tax return.
What you can do: Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.
- Getting a tax bill for an emergency retirement distribution. Due to the pandemic, you can withdraw money from retirement accounts in 2020 without getting a 10% early withdrawal penalty, but you’ll still have to pay income taxes on the amount withdrawn. If you don’t plan for this extra tax you will be surprised with an additional tax bill. And you may still get an underpayment penalty bill from the IRS because you did not withhold enough during the year. You may also still receive an early withdrawal penalty in error because the IRS is still scrambling to update their systems with all of this year’s tax relief changes.
What you can do: Set aside a percentage of your distribution for taxes. Your account administrator may withhold funds automatically for you when you request the withdrawal, so check your statements. Your review should be for both federal and any state tax obligations. If the withholding is not sufficient, consider sending in an estimated tax payment. And if you are charged a withdrawal penalty, ask for help to correspond with the IRS to get this charge reversed.
No one likes surprises when filing their taxes. With a little planning now, you can reduce the chance of having a surprise hit your tax return later.
Three of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully.
Here are some ideas:
Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.
Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.
Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.
Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1
If a refund is in your future, start planning now on how it can best help your financial situation.
1 https://www.wired.com/2010/12/the-science-of-charity
In an effort to reduce the amount of money paid to identity thieves who file fraudulent returns, the IRS will be implementing changes in the timing and way they handle the processing of tax returns.
These steps will continue to evolve, but recent changes will impact millions who depend on receiving an early refund.
Earlier filing of form W-2s and 1099-MISC – The timing required to send these forms to employees and vendors remains the end of January. However, the extended deadline for filing the electronic version of these forms to the IRS and Social Security Administration is now a full month earlier. This is done to allow the IRS to match records with early filed tax returns. The prior timing gap was ideal for thieves to file fraudulent tax returns.
Earned Income Tax Credit and Additional Child Tax Credit – If you file a tax return that contains either of these credits, do not expect to receive an early refund. The IRS has been mandated to hold these refund payments until February 15th or later. Given the payment backlog this will create, it is still important to file early to get your refund in the queue.
Begin planning now to be prepared for these upcoming changes. Rest assured, we can all look forward to further changes as the IRS continues to address the multi-billion dollar identity theft problem plaguing the Agency.
Imagine this – you’ve given us all your documents early, we’ve prepped and processed your tax return, you’ve reviewed it and signed the eFile forms… then we call you and advise you that your tax return rejected eFiling because someone has already filed using your social security number! Sadly, this can happen if you become one of the growing number of victims of tax return identity theft. At least one estimate shows tax-related identity theft cases have increased 650% since 2008. Identity theft can delay your tax refund, but other consequences could be credit card debt or loans taken out in your name.
To avoid becoming a victim, we recommend the following:
- Safeguard your social security number and other financial information. Don’t send financial documents via email unless you use an encryption program. To send documents to us, use our LeapFile application to securely send us documentation.
- Check your bank and credit card transactions regularly and monitor your credit ratings.
- Don’t give out your information on the phone, even if the caller identifies themselves as an agent of the IRS or other authorities.