Tax Tips for Everyone: March 2021

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Tax Tips for Everyone is created to provide updates on current tax topics and increase   understanding of terms and issues on income and other taxes.

2020 Income Tax Filing

The IRS began accepting 2020 income tax returns February 12, 2021. The IRS highly recommends electronic filing of returns to speed up processing especially if expecting a refund. A paper return mailed to the IRS is likely to be processed very slowly as they are still dealing with returns from the 2019 tax year. Filing early is also recommended to avoid being a victim of fraud.

Stimulus payment = Recovery Rebate Credit

The two rounds of stimulus checks received by most tax payers are actually advance payments of a special refundable tax credit. In the first payment, most tax payers received $1200 each plus $500 for each dependent (a family of four should have received $3400). The second stimulus payment was for $600 for each individual and dependent (a family of four receiving $2400).

On their 2020 income tax return tax payers will report how much was received to reconcile the amount with the IRS. The main purpose is to ensure everyone got all of the stimulus and to provide the stimulus to those who did not receive the full amount.  For example: if a child was born (or adopted) after the 2019 taxes were filed the IRS likely did not include another $500 or $600 in the stimulus payments.  The payment can still be received as a credit on a 2020 tax return. Do not list stimulus payments as income. They are not taxable.

Charitable Giving Deduction

On the 2020 income tax return individuals and couples can deduct up to $300 in charitable giving.  Generally, most tax payers use the standard deduction and do not itemize deductions which prevents getting any deduction for charitable giving.  The stimulus bill passed last year allows for nonitemizers to include up to $300 on their 2020 return.  The amount is per return, not per person, on the 2020 return.  The deduction in 2020 could save $30 to $36 in taxes for tax payers in the 10% to 12% tax brackets. Taxpayers who itemize should keep receipts of donations as the IRS will be watching, especially for higher than average donations.

Deduction vs. Credit

Confusion exists as to what is the difference between a tax deduction and a tax credit. A deduction reduces one’s taxable income and lowers the tax due based on the tax bracket of the tax payer. (i.e. A $1000 deduction would reduce the tax owed by $120 for a tax payer in the 12% tax bracket).

A tax credit is a reduction in the amount of tax owed or is an increase to the amount refunded. (i.e. Tax payers qualifying for the child tax credit receives a $2000 credit (in 2020) for each child).

Free Filing of Taxes

Many tax payers qualify for free filing of their income tax return.  Those with an adjusted gross income (AGI) of $72,000 or less in 2020 (individual or married filing jointly) can file free. The free file link on the IRS website provide connections to multiple software programs to assist taxpayers with filing their return.

Those who have never completed their own return may want to obtain assistance to ensure they receive the maximum refund allowed (or pay the minimum tax required). Elderly and low-income can get filing assistance from VITA sites.

Credit for other Dependents

There is a $500 credit for other dependents. It provides a tax credit for children over age 17 who are no longer eligible for the $2000 child tax credit or for other dependents such as an elderly parent now living with and dependent on the tax payer for support.

Standard Deduction for 2020

The standard deductions for 2020 to be reported on the returns due April 15, 2021 are:

Single or Married filing separately: $12,400, Married filing jointly or Qualifying Widow(er): $24,800, Head of household: $18,650

Federal Income tax Brackets for 2020 and 2021

Tax due is calculated on taxable income (after all deductions) not gross income.

Income Tax Brackets and Rates in 2020 (for taxes due April 15, 2021)
RATETaxable Income (single)Taxable Income (Joint)
10%$0 to $9,875$0 to $19,750
12%$9,876 to $40,125$19,751 to $80,250
22%$40,126 to $85,525$80,251 to $171,050
24%$85,526 to $163,300$171,051 to $326,600
Additional rates for 32%, 35% and 37% not listed
Income Tax Brackets and Rates in 2021 (for taxes due April 15, 2022)
RATETaxable Income (single)Taxable Income (Joint)
10%$0 to $9,950$0 to $19,900
12%$9,951 to $40, 525$19,901 to $81,050
22%$40,525 to $86,375$81,051 to $172,750
24%$86,375 to $164,925$172,751 to $329,850
Additional rates for 32%, 35% and 37% not listed