The 2021 tax season is in full swing, and like last year, the IRS has decided to extended the tax filing deadline again this year. Taxpayers will have until May 17 to file their federal taxes for tax year 2020. For taxpayers requesting a filing extension, the filing deadline is October 15, but keep in mind 2020 taxes owed will still be due on May 17, even with an extension. If you file and/or pay late, you will most likely be hit with late-filing and late-payment fees, so it is always best to file and pay on time.
Here are some tax tips that can not only help you reduce your taxable income but also reduce tax season stress and help you stay clear of potential tax scams that become more prevalent this time of year. As a quick reminder, it is always prudent to discuss any decisions regarding your taxes with a tax professional prior to acting.
Tips for reducing your tax bill
This time of year, it is always a good idea to review some of the ways to potentially lower your taxes. One of the surest ways to reduce taxable income and also save for retirement is to contribute to a retirement plan or retirement account.
If you are an employee contributing to a 401(k) plan, the limit on employee deferrals is $19,500 in 2021. If you are 50 years old or older, you can contribute an additional $6,500 into the plan for a total of $26,000 in 2021. With pre-tax contributions to a 401(k), you can essentially reduce your annual taxable income by your contribution amount.
If you have earned income, contributing to an Individual Retirement Account (IRA) can also help you save for retirement while reducing your taxable income. For 2021, individuals can contribute up to $6,000 to an IRA. If you are age 50 or older, you can contribute an additional $1,000 to an IRA for a total contribution of $7,000. Also, Individuals have until April 15 of 2021 to make 2020 contributions to their IRA, so if you have not made contributions for 2020 yet, you still have time. Again, these are pre-tax contributions that will reduce your taxable income by the amount you contribute.
Financial markets have been volatile in 2021, and while losing money on investments is never the goal, losses can be used to offset investment gains. If your situation warrants, tax-loss harvesting can be a useful tool to offset short-term and long-term capital gains and ultimately reduce ordinary income by $3,000. Losses greater than $3,000 can be carried over to future years. If you decide to implement a tax-loss harvesting strategy, it is important to have a clear understanding of which investments are being sold and what potential impact those sales will have on your portfolio and investment goals. Also, you should be aware of the IRS wash-sale rule, which prohibits investors from deducting losses from sales and then repurchasing the same security or a substantially identical security within 30 days of that sale.
Tips to reduce stress during tax season
Earlier this month, the IRS released some tips to help take some of the stress out of tax season:
– Good recordkeeping throughout the year will help make preparing a tax return easier. Keeping complete records will also help ensure you do not overlook deductions and credits. Do not forget to report all income from all sources. During normal circumstances, unemployment benefits received must be reported as taxable income on your tax return. Under the $1.9 trillion American Rescue Plan Act of 2021, the COVID-19 relief bill signed into law on March 11, federal taxes on up to $10,200 of unemployment benefits received in 2020 have been waived for individuals who made less than $150,000 in adjusted gross income. This change only applies to federal income taxes, so check with your state of residence to see if it offers the tax break. Money received from economic stimulus payments are not taxable. (1)
– If you have tax questions, IRS.gov is a good resource to get assistance 24 hours per day. The site has several online tools available that can help answer questions related to your specific circumstances. Many taxpayers are also able to use IRS.gov to file and pay taxes and get information on their accounts. For more information, you can visit the IRS Services Guide at https://www.irs.gov/pub/irs-pdf/p5136.pdf.
– The IRS always recommends individuals choose a reputable tax preparer, and taxpayers should take extra time to review their tax return to ensure it is free of errors and is complete and accurate. This can help avoid refund delays. The IRS recommends taxpayers file electronically, which can help eliminate many common errors. Some items to doublecheck include names, Social Security numbers and account and routing numbers for direct deposit. (1)
Avoid Tax Scams
Each year, the IRS releases a list of scams taxpayers should be aware of. Unfortunately, scammers use many methods to target potential victims including mail, telephone and email. Here are some of the more common scams to avoid and help ensure you keep your money and personal information safe from thieves:
– First, let us look at some things the IRS does not do. The IRS will not initiate contact with taxpayers by email, text message or social media to request personal or financial information. The IRS will not call to demand immediate payment using a specific method like a prepaid debit card, gift card or wire transfer. In most cases, the IRS will first mail a bill to a taxpayer who owes taxes.
The IRS will not demand you pay taxes without giving you an opportunity to appeal the amount the IRS says you owe, and the IRS will not threaten to bring local police, immigration, or other law enforcement to have you arrested for not paying.
The IRS cannot revoke your driver’s license, business license or immigration status. The IRS may make an unannounced visit to a home or office to collect a tax debt. The IRS can perform audits and criminal investigations and can assign certain cases to private debt collectors but only after giving the taxpayer or their representative written notice. (2)
– Due to the COVID-19 pandemic, millions of Americans lost their jobs in 2020. Unfortunately, scammers have tried to exploit this situation by filing for fraudulent unemployment benefits using stolen identities. Unemployment benefits are considered taxable income, so if you received a Form 1099-G for 2020 unemployment compensation you did not receive, you should report the fraud to your state. (3)
– Avoid email, phishing and malware schemes by being vigilant and on the lookout for unsolicited emails claiming to be from the IRS or a tax preparer. Phishing scams are used to trick victims into revealing personal and financial information that can be used to steal a person’s identity. Fraudsters can send emails presented to look like they are official communications from the IRS or others in the tax industry. They can also send links to bogus websites that are intended to look like the official IRS website. The sites may ask for information that will ultimately be used to file false tax returns, or they may contain malware that can infect your computer and allow criminals access to your personal files. (4)
– Additional scams to look out for include Social Security number scams, scams related to natural disasters, “ghost” tax return preparer scams, “tax transcript” scams, IRS impersonation telephone scams, scams targeting tax professionals and scams soliciting W-2 information from human resource professionals. For a breakdown of these additional scams, visit https://www.irs.gov/newsroom/tax-scams-consumer-alerts.
Authored by Dennis Culver, Insight Wealth Strategies
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.