If you haven’t filed your 2020 tax return with the IRS, the clock is ticking.
The extended 2021 Federal tax-filing deadline is May 17th. Your state taxes are still due on April 15th.
Filing taxes on time is extremely important for many folks this year. It’s the only way to get a refund if you are owed one.
Plus, it’s also the only way to claim previous stimulus payments you may have been eligible for but didn’t receive.
The pandemic has complicated this year’s filing process, and the American Rescue Plan signed into law in early March made changes that affect tax filing.
Here are a few of the things you should check before you file:
Unemployment Income Thresholds:
If you got unemployment insurance benefits in 2020, the American Rescue Plan made changes to what is considered taxable income.
Now, the first $10,200 of those benefits — or $20,400 for a couple filing jointly, when both partners got unemployment — is not taxable for those who have an adjusted gross income less than $150,000 in 2020.
If you had a drop in income or an event that changed how much you should have gotten, you need to file your 2020 tax return to claim the recovery rebate credit.
If you are eligible for the latest $1,400 payment in the American Rescue Plan, you also need to file your 2020 tax return so that the IRS has your updated information and can send you a direct deposit, check or debit card.
The good news is that these economic impact payments are not treated as income, so they are not taxed!
If you aren't able to file by May 17th, you can get an extension until October 15th by filing Form 4868 through your tax professional or using the Free File link on IRS.gov.
Keep in mind though, penalties, interest and additions to your taxes will begin to accrue on any unpaid tax balances as of May 17, 2021. There is no interest and penalties on taxes paid by May 17.
If you do not pay the full amount you owe by the tax deadline, even if you file an extension, you will be assessed a penalty of 0.5% of your balance due per month or part of a month after the deadline. The amount of your failure-to-pay penalty will not exceed 25% of your back taxes.
If you do not pay your full balance due, you will also owe interest on the unpaid amount. The interest rate is set quarterly by the federal government. The current 2020 interest rate for underpayment of taxes is 3%.
CARES Act Impact:
Thanks to the CARES Act you were allowed to take up to $100K out of your pre-tax accounts to get through the pandemic without paying an early withdrawal penalty if you were younger than 59 1/2 years of age.
And, the CARES Act allows you to pay the 2020 income tax dues on that early distribution over a three-year period --- meaning one-third of the taxes owed are due this year.
Also, there were no Required Minimum Distributions (RMDs) in 2020, so there won't be any taxes due on them.
RMDs will be required in 2021 -- meaning you will be responsible for paying taxes on that money.
A Word Of Caution:
Filing taxes this year is really complicated -- especially for retirees. I'd highly recommend you work with a tax professional to make sure your taxes are filed correctly. The last thing you want is to get a surprise tax bill from Uncle Sam.