The Taxman Cometh – Are You Ready?

With the start of the new year, most people are reflecting on the past and making resolutions – while not necessarily thinking about filing taxes, April 15th is coming soon! Tax season does not need to be overwhelming or confusing – if you take the time to get organized and make some plans, it can pay off, quite literally!

Three Ways to Help Prepare for Tax Season

When preparing for tax season, it is best to take a holistic approach: consider last year’s return, your expected financial future, and the current tax laws that may impact you. You can think of it as the past, present, and future of your taxes.

Looking to the Past

Most people’s tax returns remain consistent from year to year. Looking back at your 2019 individual tax return can help you plan for filing your 2020 return.

  • Review the income sources, itemized deductions, and any special credits you took on your 2019 return to see if they should remain the same in 2020.
  • If you had any major life events that could impact your taxes, be sure to take them into consideration as well. Changes in dependents, work status, or state of residence can all have a significant effect.
  • Using your previous year’s tax return for reference, make a list of the tax forms or other supporting documents you may need. They might include:
    • Form W-2 from your employer(s)
    • Forms 1099-DIV, 1099-INT, or Consolidated Form 1099s from your bank or brokerage house
    • Form 1099-MISC if you have self-employment, rental, or certain other types of income (for 2020, you may receive this on form 1099-NEC, which is a new form for the 2020 tax year)
    • Form 1099-R if you received distributions from a retirement account
    • Forms K-1 if you have an interest in a Partnership, S Corporation, Trust or Estate
    • Form 5498 if you made IRA contributions – particularly if you made Traditional IRA contributions
    • Forms 1098 reporting mortgage interest you may have paid over the year
    • Receipts or letters to support any deductions for charitable donations
    • The dates and amounts of any estimated tax payments you may have made to the IRS or your resident state
  • If you have business or rental activity on your tax return, start gathering the totals and supporting documents for your income and related expenses, as it can take some time to get that information together.

Staying in the Present

Major tax law changes may not occur every year, but there are generally still smaller updates that may impact your taxes.

  • Be aware of the current standard deduction amounts and tax rates. For 2020, the standard deduction for a Married Filing Jointly couple is $24,800, and the deduction for a Taxpayer filing Single is $12,400. You can find more details about the current year’s standard deduction and tax rates at www.irs.gov.
  • For 2020, the biggest changes to individual tax laws are related to the CARES Act, which was passed in response to the COVID-19 pandemic.
    • An ‘above the line’ deduction of up to $300 is available for cash contributions to qualified charitable organizations. This deduction is available even if a taxpayer is not itemizing their deductions.
    • The previous limit of 60% of AGI for deducting qualified cash contributions has been lifted for the 2020 tax year; taxpayers may deduct qualified cash charitable contributions of up to 100% of their AGI.
    • Usually, early withdrawals from retirement plans are subject to a 10% penalty as well as any tax due on the distribution. Under the CARES Act, COVID-related early distributions of up to $100,000 can be treated as Qualified Disaster Distributions, avoiding the penalty and spreading out the taxable income over 3 years.
    • The obligation for retirees to take RMDs for 2020 was lifted.
    • If you were eligible for an Economic Impact Payment but did not receive one, or did not receive the full amount, you may be eligible for a Recovery Rebate Tax Credit on your 2020 individual return.

You may also be able to take advantage of some last-minute tax planning and saving opportunities, some of which can even occur after the end of the calendar year.

  • Contributing to an IRA may allow you a deduction on your return; be sure to check the rules for eligibility – you must have sufficient earned income, and for Traditional IRAs you must meet guidelines regarding employer retirement plan coverage eligibility for the contribution to be deductible. These IRA contributions can be made until your tax return due date (not including extensions), so there’s still time!
  • If your income didn’t have tax withheld, you may need to make estimated payments to the IRS or your resident state. Reach out to your tax professional to see if this is something to consider.

Planning for the Future

Once your 2020 taxes are behind you, take a moment to review them and make any necessary changes for 2021 and beyond.

  • Update the tax withholding on your W-2 or retirement income, if needed
  • Set up a schedule for making Federal and state estimated tax payments
  • Plan out your charitable contribution budget, possibly waiting and bundling them together to maximize deductions
  • If you made Traditional IRA contributions, it may be worthwhile to consider a Roth conversion – particularly if the original contributions have not had time to earn much
  • As the year progresses, look at the realized gains in any investment accounts you may have. It may be beneficial to harvest some losses before the end of the current calendar year in order to help offset the gains; your broker or financial advisor should be able to help with this.

Tax season doesn’t need to be overwhelming or stressful if you take the time to organize and plan. At Thompson Greenspon, your success is our goal – reach out today to learn how we can help you tackle your taxes and plan for your future.

© 2021


Written by: Allison Swanberg

Allison Swanberg is a Tax Senior with Thompson Greenspon and joined the firm in 2020. Prior to joining the firm, she worked for a smaller local firm which specialized in individual tax planning and small business accounting. Allison provides and accounting services for individuals, fiduciary entities, and small to mid-size partnerships and S-Corporations, as well as planning strategies such as cost segregation studies.

Allison has a Bachelors degree from Virginia Tech and is currently pursuing her CPA Certification. She is a member of the Accounting and Finance Women’s Alliance (DC Chapter) and served as a committee member from 2019 to 2020. She is also a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants.

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