As we enter the prime of the 2021 tax season, it’s important to be aware and prepared for what’s changed since last year.

Crystal Sprague has more than 15 years of professional tax experience.

Fortunately, Northside Tax Service has you covered. Their team of experienced tax preparers is ready to help you get the most from your deductions and leave you with the most favorable tax bill possible.

Crystal Sprague, a Northside preparer, is entering her 18th year of professional tax work. She’s an expert in family tax returns and those with foreign income. Here are just a few things she says to consider when filing your 2020 returns:

Unemployment and Stimulus Payments

People with low to moderate incomes often receive an earned income tax credit (EITC) and additional child tax credits (ACTC), both based on earned income in a given year. This year, the IRS is letting people use either their 2019 income or 2020 income to determine their EITC and ACTC. This means that you can use the income from whichever year will get you the largest EITC and ACTC.

The 2020 tax year includes numerous pandemic-related considerations of which to be aware. Photo courtesy Northside Tax Service

Regarding economic stimulus payments, Sprague says they don’t count towards taxable income. However, not everyone eligible received them, or received them in full. If that describes you, you’re still in luck, thanks to the Recovery Rebate Credit, which allows you to claim stimulus as a tax credit. This credit also applies to former dependents.

“If somebody turned 18 in 2019, and now they’re filing their own tax return, they can qualify to get both stimulus payments now,” says Sprague.

If you didn’t receive a stimulus payment you were eligible for last year, you can claim it as a credit on your taxes this year. Photo courtesy Northside Tax Service

Charitable Donations

A new IRS change allows a charitable deduction of up to $300 for cash donations in 2020 to qualifying organizations, Sprague says, provided you don’t itemize all your deductions. Allowed because of pandemic-related economic hardship, the deduction will help reduce taxable income further. Next year, this deduction is set to increase to $600 for married couples, Sprague says.

Charitable deductions can help reduce your tax burden. Photo courtesy Northside Tax Service

Health Savings Accounts

Those with health savings accounts, or HSAs, will be happy to know that their accounts can be used to reimburse even more this year than the usual deductibles, copays and prescription medications. As of January 1, 2020, HSAs can now be used for over-the-counter, non-prescription medicines, diapers, and feminine hygiene products, among others, Sprague says. More information is available on the IRS website.  

401ks and IRAs

The passage of the CARES Act provided special coronavirus-related options for distribution income from retirement accounts.

Sprague says that individuals were able to take out up to $100,000 last year for issues directly related to COVID-19, whether the negative impacts were medical or just financial. Those who do so have the options of only declaring a third of their amount taxable each year. There’s also the option of repaying within three years, which will earn you a deduction.

Minimum distribution requirements were also suspended last year in the wake of the pandemic, and age at which the RMD rule kicks in has also changed, up to 72 years from the previous 70.5. To meet this requirement, individuals must have been at least 70.5 years old as after 12/31/2019.

Finally, those expecting a child via traditional birth or adoption can take out $5,000 from a retirement account without the 10 percent penalty that’s usually issued for those under the age of 59.5.

If You Get a Letter

Because the IRS is significantly behind in processing returns from last year, some people may be receiving letters saying the IRS hasn’t received their 2019 returns. Sprague says it’s important to not panic if you did your part last year, and to contact any numbers listed in such a letter to update the issue. If you have questions about an IRS letter you received, Northside Tax Service offers free assistance with IRS letters and notices. Just bring your letter in and one of their tax preparers will be happy to help you determine next steps.

Schedule Cs

While there are no major changes for self-employment tax returns, known as Schedule Cs, there is a subtle difference to remember when filing, Sprague says.

The IRS now asks self-employed workers to use 1099-NEC contractor forms. The 1099-MISC form is still being used, but only for rental and other types of miscellaneous income. NECs will only be sent to you by entities which paid $600 or more, Sprague says, meaning income less than $600 per entity is your own responsibility to keep track of.

The Northside Tax team (left to right): Marny Barrau, Michael Langley, Danyel Cammon, Mary Carlson, and Crystal Sprague. Photo courtesy Northside Tax Service

“I really recommend that contractors use some sort of software for their bookkeeping,” she says. “Quicken, or QuickBooks, or even their own spreadsheets, to keep track of income and expenses.”

If you’re new to filing a Schedule C, it’s important to remember deductions can be made for any business-related expense, including office supplies, business cards, web design, advertising, and mileage.

When deducting mileage, Sprague notes that you must keep track of both overall mileage and business mileage, and report them both. Business meetings can also be used to deduct meals, but Sprague cautions it’s critical to keep every receipt, in the event you’re audited. And too many “business” meals, she says, are more likely to get you audited.

Finally, equipment purchases can be claimed as depreciable items, spreading out the money spent on equipment over several tax years.

What To Remember

When coming to Northside, be sure to bring photo identification or other verifiable documentation (social security card, previous year’s tax return) to prove you’re you! Sprague says a previous return is also a good reference for the preparer, ensuring nothing’s been missed.

Currently, Northside is encouraging their drop-off service to limit time in the office. Appointments can be easily made by phone or their website. They are also offering an online tax prep service, so you don’t even have to leave your home to file with one of their tax preparers.

Still, things will get very busy as April 15 approaches.

“March is a good month,” Sprague says, of getting your taxes done. “I recommend not waiting until the last minute, because you might not get an appointment.”

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