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.
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Read nowIn 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 ofCOVID-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.
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.
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.
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 toCOVID-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.
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:
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.
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."
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.
The web-based Treasury form should fix this if a payment doesn't show up in your bank account.
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.
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).
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.]