Tax season is here. And if you thought that trying to figure out the United States tax code could not get more byzantine, well, you were wrong. Because it has. The pandemic is wreaking havoc on tax prep as the IRS doubles back to classify and clarify the implications of pandemic relief measures. The $1.9 billion American Rescue Plan helps, as it includes significant relief aimed at easing the burden on parents. And the IRS has pushed the filing deadline to May 17th to give everyone some extra time. But, still, filing taxes could get a bit messy this year — especially for parents. Whether you take on the task solo or go in with a tax pro, here are nine big things to consider before jumping into your 2020 tax prep.
1. Look closely at your 2019 and 2020 earnings before rushing to file.
This might sound counterintuitive, but in some cases, it might make sense to file for an extension on your 2020 taxes. Here’s why: the American Rescue Plan uses either your 2019 or 2020 tax return to determine how much stimulus you’re eligible for. And if you made more money in 2020 than 2019, you might get shut out of the next round of stimulus. If you’re single and make less than $75,000, you’ll get $1,400 — and if you’re married and make less than $150,000 jointly, you’ll get $2,800.
BUT here’s the catch — the phase out of both of these plans is at $80,000/$160,000. Meaning, if you made less than that in 2019, but more in 2020, you’ll get nothing. “That doesn’t just include those payments, but it also includes the $1,400 stimulus payments for the dependents that you you add on your tax return — children under the age of 18, and dependents up to the age of 24 who you’re paying more than fifty percent of the expenses for,” says Jenkin. So a relatively small increase or decrease in your earnings from 2019 to 2020 could have significant consequences.
2. Don’t forget that your unemployment is taxable.
“The number one issue I’ve seen coming up with clients for 2020 is that they didn’t know that drawing unemployment benefits is a taxable event,” says NYC CPA Jonathan Medows. Remember to claim your unemployment when filing. If you didn’t have taxes taken out when drawing unemployment checks, you may need to prepare to owe more than you thought.
3. Make a charitable contribution? You should deduct it.
Maybe you, like me, weren’t economically devastated in the first few months of COVID, and were moved to contribute to those who were. Maybe you donated to a local food bank, or you were watching that Together at Home telethon back in April where Taylor Swift and the Rolling Stones inspired you to get out your credit card to send money to the WHO. Thanks to the CARES act, you can deduct that expenditure — or any other charitable donation — up to $300 total, even if you’re part of the nearly 90 percent of filers who take a standard deduction.
4. Did you have a baby this year? Make sure they have a Social Security number.
This might sound obvious, but if you had a kid in 2020, make sure they have a Social Security number so you can claim them as your dependent — and qualify for the tax benefits and credits coming your way. “People forget. It happens,” says Medows. If your baby was born in the hospital, you likely started the process there; if you had a home birth, you need to start the process yourself at a Social Security office.
5. If you’re self-employed and got sick due to COVID in 2020, or cared for someone who was sick with COVID, you may qualify for a credit.
Parents who work for themselves had it hard in 2020, but some may find relief with IRS form 7202. If you got sick from COVID and needed to take time off, or cared for a family member or child who got sick, you may qualify for tax credits, up to ten days worth of work, based on your earnings. Most notably, this also applies to those whose child care providers shut down due to COVID precautions. (That’s a lot of us.)
6. If you bought Bitcoin — or other crypto — you need to fess up.
Just as a single Bitcoin is passing the $50,000 mark, the IRS is getting serious about cryptocurrency. On your 2020 return you’ll be asked to check a box as to whether “at any time during 2020, did you sell, receive, send, exchange, or otherwise acquire any financial interest in any virtual currency.” It’s interesting that they’re not asking you if you sold any digital currency and made a profit on it — which would be a taxable event which you’d need to provide paperwork for. They’re asking you if you hold any, so even if there’s been no taxable event, you’re still telling the IRS that you own crypto. This, Jenkin says, is a real pickle. “Cryptocurrency applications like Coinbase and Kraken don’t provide a 1099 to the IRS, so the IRS isn’t going to know whether you made money or not,” he says. “I think you’re going to have the deep dark web people that don’t tell the government anything. And you’re gonna have people that are truthful that they have an account — and then the IRS is gonna wonder why they haven’t gotten their tax money.”
7. Got an adult child in the house? You might need to have an awkward conversation.
The American Rescue Plan opens up stimulus money to anyone with dependents — meaning adult children (under age 24) and college students living at home with their parents now qualify their parents for $1,400 in aid (if their earnings are under the amounts specified in #1.) Here’s the catch: your 20-year old son with a couple of part time jobs might think he qualifies for the check himself. “It’s going to be a real conversation. Possession is nine tenths of the law, you know? If you’re paying most of their expenses, and they are your dependent, that’s not their money — its your, or ‘our’ money,” says Jenkin.
8. Don’t forget your Robinhood phase.
If you’re one of the 13 million people who played the stock market via the Robinhood app in 2020, you may have tax consequences, if you won or lost. The company isn’t mailing out 1099s — you’ll need to log on to your account to download them. Some day traders are reporting Robinhood tax reports 374 pages long. Good luck.
9. And don’t forget about spousal contributions.
You might already know that you have up to April 15 to fund your IRA account for 2020, and gain any tax benefits for doing so. But you might not know that you can fund your partner’s, too. “If there is one breadwinner in a household, that one person can contribute not only to their own IRA, but also to an IRA for the spouse,” says Jeff Winn, Managing Partner at International Assets Advisory. “It’s really common for people to forget that a spouse without a job can still have an IRA in their own name, so long as it is funded by a spouse with ample income.”