Tax season is often a stressful time for most people. It's especially true for taxpayers with complicated tax filing needs due to owning a business or having a significant amount of investments, among other situations.
In 2021, much like 2020, we're also dealing with a global crisis that only occurs about once every 100 years: a pandemic that must be contained through both individual and institutional efforts. Because of COVID-19 and countless industries have been temporarily shuttered. Last year saw many state governments instituted closures of nonessential businesses that caused more than 10 million Americans to file for unemployment in March 2020.
Subsequently, the ordinary stress that taxpayers and tax professionals experience every January to April has been compounded by lockdowns, a strained healthcare system, economic devastation and adjusting to an awkward present and uncertain future. Under ordinary circumstances, you would need to file and pay your taxes due by April 18.
Tax professionals advise that you take advantage of this additional time to understand their tax situations better. Chris Cherico, Enrolled Agent and Founder of Cary, North Carolina-based Guardian Tax Solutions, found this to be the case for his clients. "As devastating as the virus has been to the entire world," he said, "I have found my clients are utilizing the downtime to understand the taxable implications of their decisions better. We have utilized video calls to stay in contact and go over key decisions they have made in their personal and business lives."
We've compiled a thorough guide to help you understand the tax filing process to make this trying time easier.
See also: The income tax guide 2022.
Do I have to file a tax return?
You might not have to file a tax return depending on your income and other factors. Usually, before considering any tax benefits, your gross income for the year is the main determinant, but there are other situations where you may still need to file. The IRS has a filing requirements chart that explains gross income filing requirements based on age and filing status. You must file for single taxpayers under 65 if your gross income was at least $12,400. The IRS also has a tool that helps determine whether you must file a return.
For most employees, you will need to file if your total income exceeds your filing status's gross income filing requirement. For students and part-time workers likely to fall below this limit, you may not be mandated to file, but you still may want to in order to get a refund. Students and other people who are likely claimed as dependents on another person's taxes should consult this table on IRS.gov to determine if they are required to file a tax return.
There are some exceptions to the gross income filing requirement. The most common one is self-employment. If you have any self-employment income, such as freelancing, gig work or any "side hustles," this income is usually reported on a 1099-MISC form. You may not receive a 1099-MISC form in some cases. Regardless, you need to file a tax return if your net income for the year (income after self-employment related expenses) was at least $400.
There are other reasons you may need to file a tax return even if your income is below the gross income filing requirement, such as receiving the advance premium tax credit on marketplace health plans. This table on IRS.gov explains the other reasons you may still need to file, which are less common than self-employment and the premium tax credit.
If you are not a resident of the United States and file a 1040NR tax return, these rules only apply to your U.S.-sourced income. You don't have to include any foreign-sourced income in your gross income when determining whether or not you should file a tax return. The gross income filing requirement is still similar to that for U.S. citizens, although you can omit foreign-sourced income. However, there may also be tax treaties in place that you qualify for based on your country of residency, so you should check out this guide on IRS.gov to determine if you still must file a U.S. tax return.
Where can I file my taxes?
If you want to prepare your own taxes, most people with income of $72,000 or less can use the Free File program. Free File vendors include TaxAct, 1040NOW, TaxSlayer, and other well-known tax software providers who also offer commercial versions if you're ineligible for Free File. If you live in a state that has an income tax, you should check which versions offer free state returns. Each vendor also imposes its own income and age limits.
If you want to file a paper return, the mailing address varies based on where you live and whether you're sending a payment or not. You can find the filing address directory here.
You can also work with an independent tax professional or tax filing service online without needing to go to a tax office. Today, most tax practices offer expedited and secure tax interviews and ways to electronically transmit your information if you cannot mail your documents. If you don't have a recommendation for a tax professional through a friend or colleague, the IRS has a federal directory of tax professionals. You can also find a local tax expert through professional societies like the National Association of Tax Professionals and the National Association of Enrolled Agents.
How long does it take to receive a refund or process my payment?
On average, tax refunds show up within 21 days of filing your tax return. Paper checks will take longer, and direct deposit will be faster. Non-residents filing 1040NR tax returns typically face waits of 6 months or longer. You can use the Where's My Refund? tool on IRS.gov to track your refund.
These wait times are under normal circumstances, but they are likely to be twice as long in 2022 since IRS operations are currently fractured due to COVID-19.
If you have a balance due, payment processing speed depends on whether you use DirectPay, EFTPS (Electronically Filed Tax Payment System), arrange withdrawal through your tax software or write a check. DirectPay is the quickest and easiest option to make federal tax payments since you do not need to create an account, unlike EFTPS. However, both EFTPS and DirectPay payments usually take two to five business days to debit your account. Your tax software may vary, but payments will typically process within one to two business days after the provider accepts your tax return.
After your income has been accounted for, deductions are the first tax break you need to compute. There are two types of deductions: adjustments (above-the-line deductions) and below-the-line deductions. Anyone eligible for adjustments can claim them, but there are only two types of below-the-line deductions: standard and itemized. Most people have taken the standard deduction since the 2018 tax reform suspended, limited or eliminated several itemized deductions.
Deductions reduce your taxable income. However, adjustments can have a ripple effect on other tax benefits, which makes them more advantageous than below-the-line deductions. Business expense deductions for self-employed people also reduce the amount of self-employment tax that has to be paid, while below-the-line deductions only affect income tax.
- Student loan interest: Most people can deduct interest paid on both federal and private student loans. You can deduct up to $2,500 in interest paid throughout the year, provided your total income for 2021 is under $85,000 ($170,000 if married filing jointly), and the loan was for your education or that of your spouse or dependent. This deduction is also an adjustment, so you don't have to itemize to claim it.
- Mortgage interest and real estate taxes: If you own your home, you can deduct your mortgage interest and real estate taxes, as well as points paid. However, after the passage of the 2018 tax reform, your combined deduction for mortgage interest, points and real estate taxes for the year cannot exceed $10,000. You have to itemize to claim this deduction.
- IRA contributions: If you don't have access to a retirement plan through your job or haven't opened a SEP (Simplified Employer Pension) or other retirement accounts through your own business, you can start an individual retirement arrangement (IRA). The contribution limit for 2021 is $6,000 ($7,000 if you are 50 or older). You can only claim this adjustment if you contribute to a traditional IRA, not a Roth IRA.
- Charitable donations: If you itemize, you can deduct gifts to charity, like cash and credit card donations to houses of worship, nonprofits, civic organizations and educational institutions. You can also deduct non-cash donations and expenses related to volunteer work.
- Medical and dental expenses: If you itemize, you can deduct a portion of your medical and dental expenses for the year. This includes prescription drugs, insulin, medical supplies and devices, medical and dental insurance premiums, travel related to medical care, and fees to doctors, hospitals and labs. Your deduction is limited to the amount exceeding 10% of your adjusted gross income, which is based on your income after the adjustments you are eligible for.
- Alimony payments: If you have to make alimony payments as a divorce condition or a separate maintenance agreement, you can deduct these payments (taxable income to the recipient). If these enforced payments include amounts for child support, child support is considered to "come first" and is not deductible when computing deductible alimony payments.
- Bad debt write-offs: If you lent money to someone and never got repaid, you might be able to take a bad debt deduction. Having a written agreement with the borrower helps prove your case that the money was a loan and not a gift, along with proof that you made efforts to collect what they owed you and that there is little or no chance the borrower will ever repay you (such as death or bankruptcy). Bad debt deductions are treated as a capital loss, so you are limited to deducting $3,000 per year of the unpaid balance.
- Qualified business income (QBI) deduction: The QBI deduction is a new deduction created by the 2018 tax reform that enables you to deduct up to 20% of your profits from self-employment. The deduction is based on your profit relative to your total taxable income, which can't exceed $157,500 ($315,000 if married filing jointly). It is a below-the-line deduction that comes after your standard or itemized deduction, and anyone who has self-employment income that qualifies for the deduction is allowed to take it. There are fewer limitations if your income is under the above amounts.
- Health and dental insurance premiums for the self-employed: Self-employed people can deduct their medical and dental insurance premiums without needing to itemize. This is available as an adjustment if you have self-employment income and don't receive employer-based health coverage. Many people, including tax software developers, often overlook the dental portion, so be sure to include it if you are eligible.
- Tuition and fees: You can deduct up to $4,000 of qualified tuition and related fees at accredited institutions as an adjustment if the expenses were for you, your spouse or dependents. The tax credits for education are usually more beneficial than this deduction, but it is an option if you are already claiming the credit for another student or you are otherwise ineligible for the credit.
What are common audit risks?
Audits are not as common as the movies might have you believe. The IRS only examined 0.5% of tax returns in 2017, and just 25.2% of 2018's examinations were the "field audits" seen in the media. A letter from the IRS, even one asking for corrections or clarifications on your tax return, is not an audit. Examinations are usually cleared up with mail and phone correspondence and, if necessary, amended tax returns.
The following are the most common "red flags" that won't necessarily trigger an audit but are more likely to cause your tax return to be pulled for examination:
- You didn't report all of your income: Any income where you receive a form for it, such as a W-2 for wages, W-2G for unemployment and 1099 for investing activity or freelance work, also means that the IRS received a copy. If you don't report all of your income, it is likely to trigger an examination.
- Your adjusted gross income is $200,000 or higher: Higher-income individuals are inherently more likely to be audited because it simply isn't worth a revenue agent's time to enforce collections on lower-income taxpayers less likely to have the ability to pay. Incomes of $200,000 and higher are when examinations become more probable since tax filing situations are also more likely to be complex with respect to tax breaks and income sources alike.
- You reported a huge amount of gifts to charity: Reporting incredibly high charity deductions is an audit trigger since large donations require more substantiation from you and the recipient. This is most common with non-cash donations, like clothing donations to Goodwill. Any non-cash gift exceeding $300 needs written proof from the organization.
- You own a business: Small business owners and freelancers are more likely to be audited because they don't always have records of their income on 1099s, and they have to substantiate both income and expenses.
- Excessive travel and meal expenses if you are self-employed: Of all the business expenses available to the self-employed, travel is the largest red flag since it can be taken for trying to deduct vacations or trips with no commercial substance.
Se also: The income tax guide 2022.
Tax credits are more beneficial than deductions because they are dollar-for-dollar reductions of your tax bill. Non-refundable credits only shave off part of your tax bill to the extent that you have one, while refundable credits will be refunded to you regardless of whether you have a tax liability or not.
It has no bearing on how much taxes you had withheld; it's based on your assessed tax after all of your deductions.
- Child and Other Dependents Tax Credit: You can get a non-refundable credit of up to $2,000 per child under the age of 17 and $500 for other dependents.
- Additional Child Tax Credit: If you have three or more qualifying children or are due to the refundable portion of the Child Tax Credit worth up to $1,400, you need to claim this credit.
- Child and Dependent Care Credit: This non-refundable credit is worth up to $3,000 for one dependent child up to the age of 13, with a max of $6,000 for two or more children if you needed childcare in order to work. You can also claim this credit for your spouse and other individuals you support who are incapable of caring for themselves.
- Saver's Credit: Low- and moderate-income individuals can get a non-refundable tax credit for making contributions to retirement accounts like IRAs (even Roth IRAs), 401(k) plans and other qualified plans that are worth 10% to 50% of the contributions.
- Residential Energy Credit: You can get a non-refundable tax credit worth up to 30% of the costs of green energy home improvements, such as solar panels, geothermal pumps and energy-efficient windows, among others.
- American Opportunity Credit: This tax credit is worth up to $2,500 and is non-refundable but has a refundable portion worth up to $1,000. You, your spouse or your dependent must be enrolled in a degree program and be in the first four years of post-high school education and not have any felony drug convictions as of the end of the tax year.
COVID-19 impact on taxes
Deadline extension and tax payment deferral
The tax filing deadline has been extended until April 18, 2022. If you're able to, it would be wise to file your taxes sooner rather than later, even if you owe money. If you file before the deadline, you will not owe a late filing penalty and have time to figure out your options for payment plans. However, given the stressful time we are facing with massive job losses and hospitalizations, if you do not think you will have your taxes ready by April 18, you can file for an extension, which would give you until October 17, 2022.
The COVID-19 extension also applies to estimated tax payments that are normally due by April 18, but not any other estimated tax payments or other balances due.
Personal and business relief programs have been confusing to follow, but your tax professional can help. Ben Burke, Enrolled Agent and owner of Snappy Tax in Ocala, Florida, added, "Client communications have been difficult because the information is changing every day and each state and lending institution has a different process to follow. Nevertheless, my team and I have published resource guides, hosted video conferences, and are staying on the phones to support the people who are the backbone of this economy during this difficult time."
Filing taxes FAQ
Can I still get the coronavirus relief check if I did not file a tax return?
Yes, the IRS has announced that a web-based Treasury form is coming soon that you can use if you did not file taxes before.
What if my bank information is out-of-date?
The web-based Treasury form should fix this if a payment doesn't show up in your bank account.
How long is the relief check available for?
You will be able to apply for the relief check throughout 2020 if it doesn't automatically appear in your bank account and if you meet the income guidelines.
Who is ineligible for the relief check?
People who don't have valid Social Security numbers, anyone claimed as someone else's dependent, non-resident aliens and residents of U.S. territories (e.g. Virgin Islands, Puerto Rico).
Will the IRS contact me if they can't locate my address or bank information?
You might receive a letter at your last-used address. Be wary of COVID-19 and IRS scams. The IRS will only contact you by mail, never by telephone, email, text or social media.
Se also: The income tax guide 2022.
[This article was originally published on The Simple Dollar in April 2020. It was updated in January 2022.]