The 2021 tax season is here…or is it? From a delayed tax season to a first, second, and maybe third stimulus check, let’s talk about what’s going on with taxes in 2021 as the pandemic continues to shape the world around us.
Accountants and income tax preparers were thrown through a loop last year when the coronavirus pandemic hit just as the busiest part of our season was starting. As this article recalls, tax preparers quickly adjusted to the government regulations of maintaining social distance, limiting in-person contact, and staying at home. The results of such regulations was many businesses hosting meetings with clients over Zoom, sending sensitive information through secured portals, and making sense of new economic programs.
As an accounting firm, we were no strangers to these adjustments. And neither were our clients. The question is: Are we prepared to do it all again? Before we dive into that, let’s take a look at some things that are going on in the tax world that could affect just how “prepared” we are. First: Delayed start of tax season.
IRS Delays Start of Tax Season to February 12
Last year, the IRS began accepting and processing returns from individual filers on Monday, January 27th. Last week, the IRS announced the nation’s tax season will start Friday, February 12. That’s the day the tax agency will begin accepting and processing 2020 tax year returns.
Sure, that’s a two- to three-week difference, but what exactly does this mean for filers? Since the Internal Revenue Service has pushed back the start of tax season to February 12, such a move could delay refunds for millions of Americans.
According to this article, the IRS said it has pushed back the filing start to allow for “additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits.” In layman’s terms, the IRS is explaining that the cause of delay is for those who did not receive their payments; they may be eligible for a rebate when they file their 2020 taxes.
“If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers. These changes ensure that eligible people will receive any remaining stimulus money as a Recovery Rebate Credit when they file their 2020 tax return,” the IRS said.
Right now, we assume that this year’s tax deadline for filing 2020 tax returns is April 15. Unless it’s changed, the deadline for requesting an extension is October 15.
Is Your Stimulus Check Taxable?
Back in December of 2020, this article was published addressing mass concerns about whether you have to pay taxes on your second stimulus check (and a third one, if that is released in the future). In short: stimulus checks are not taxable. The article breaks down tax codes, mentions Uncle Sam, and talks about tax credits. Here’s the rundown:
The tax code says you have to pay taxes on “all income from whatever source derived,” unless it’s specifically exempted or excluded. That’s a pretty broad definition that seemingly would include money from the government. And, strictly speaking, there’s no specific exemption or exclusion for stimulus check money. So, stimulus checks are taxable – right?
Wrong! There’s a loophole in the law that prevents you from having to pay taxes on the stimulus check money you get from Uncle Sam. As it turns out, your stimulus check isn’t “income” after all, according to the law. Instead, it’s simply an advance payment of a tax credit. And tax credits aren’t taxable income.
What does this mean for you? The IRS sums it up rather nicely: The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. So, if the credit is higher than the combined total of your stimulus checks, your 2020 tax bill will be lower, and you might even get a refund. If your stimulus checks were higher than the allowed credit, you get to keep the difference.
What happens if you didn’t get the first stimulus check? You can claim it as a credit on your 2021 taxes. What happens if you didn’t get your second stimulus check. The IRS had until Friday, January 15th, to get you your money. If you never received it, you can also claim it as a credit on your 2021 taxes.
Managing Tax Brackets
Your 2020 tax bracket and federal tax rate are both crucial pieces of information if you want to keep as much of your money as possible. Yahoo!Finance gives a guided overview of how to handle IRS tax brackets and preparing to file for 2021. According to their article, the first step to surviving tax season is to know which bracket you fall into and which category you’ll file under. From there, do everything possible to reduce your taxable income — without concealing income, of course. If you’re uncertain about anything, ask for advice from a professional and use an income tax calculator.
What is a tax bracket? The U.S. uses the 2020 federal income tax brackets to determine. how much money you’ll owe the IRS or how much of a federal income tax refund you will receive. IRS tax brackets are divided based on your taxable income level, with different amounts taxed at different federal income tax rates.
Each individual filing category contains seven income-based 2020 federal tax brackets. Brackets range from those who made no income at all to the wealthiest individuals — in the highest federal tax rate bracket — who earn $622,051 or more in a tax year.
Preparing for Taxes: What Receipts to Keep as a Small Business Owner
Gathering and saving receipts and tax documents is an important part of filing taxes and receiving your refund quickly. Whether you take the standard deduction or itemize deductions, most people filing their 2019 taxes in 2020 will be happy they took the time to prepare when the IRS deadline rolls around.
This article provides a detailed list of what to keep as a small business owner in order to maximize your refund. We encourage you to give it a read, because the list includes documents, gross receipts, and business purchases.
At the same time, we’re reminded that sometimes canceled checks are not enough to support a deduction, according to Bonnie Lee, an enrolled agent and owner of Taxpertise in Sonoma, California. “A check made out to Costco is not proof of a business expense because you could be buying groceries and other personal items. Credit card charges for a business trip to Maui will smell like a vacation unless you can provide other documentation to support the business purpose. So be sure to keep the receipts, business conference flyers, etc. to defend business usage.”
How Accounting Firms Are Preparing for Tax Season
The reality is that tax season is still tax season; a pandemic won’t stop taxpayers from having to pay taxes which means tax preparation services will need to solidify how we’re going to do our job, delay or not. We did it last year and we can do it again this year…just with some necessary adjustments.
There’s no doubt that accounting firms across the nation are making themselves more available to assist taxpayers and alleviate some stresses that might naturally arise. What initially started off as many accountants cancelling in-office appointments ended with client file drop-offs or emails. One accounting firm in Texas highlights that some firms are preparing for the tax season by taking precautions to provide a safe experience with a drop-off service and after-hours appointment.
“While walk-in service is still available,” says the article, “those who don’t feel comfortable being in the office can drop off their paperwork curbside.” You can sign the completed documents in your car, creating a limited-contact tax filing process (while also giving In-N-Out’s “eating in the car” system a run for its money).
Another accounting firm has published an article that highlights the importance of having patience for this upcoming tax season. “As we begin our work for the tax season one word keeps echoing,” says the article, “and that word is patience.” While that word might be unique to toss around when preparing for tax season, it’s necessary. The article explains that we must have patience during this 2021 tax season as accounting firms and filers because there are still a good number of kinks to be worked out throughout the filing process.
Some Tips to Keep in Mind When Preparing for the 2021 Tax Season
– Be flexible. Many states are still addressing their response to late federal legislation; many won’t conform to federal rules on non-taxable PPP loans.
– Be patient. We’ve already talked about this, but emphasis is necessary. Patience is important with CPA firms that are also dealing with COVID compliance and the pressing demands of new legislation that is keeping businesses afloat. Tax software packages likewise still need time to catch up with these programs.
– Go paperless. With huge IRS backlogs, Postal Service delays, and many closed offices, doing things electronically offers a smoother process.
– Be safe. When it comes to e-filing, email is not enough; your tax preparer should have a secure portal for the transmission of your confidential financial information. If the firm you work with doesn’t have a secure online portal, ask what they are doing to protect your documents. Remember that it isn’t unusual for CPA services to have a secure online portal, by the way, so it’s best to go with a firm that is already making these adjustments for you.
Check out the links below for additional information regarding taxes:
- Key Points of the New Federal COVID-19 Bill
- PPP Forgiveness and 2020 Income Taxes
- Understanding the New Small Business Hiring Credit – CA
At Prospect Financial Solutions, our goal is to keep you updated on the latest tax news and to simplify finances, especially for small businesses and nonprofit organizations.