Yes, it’s already tax season again.
While it seems like the 2020 tax season just ended (you may recall that it was extended from its normal April deadline to June last year due to the COVID-19 pandemic), it’s time to get your W-2 forms together and get ready to file your 2020 taxes before the April 15, 2021 deadline.
But before we get into a few of the reasons why tax season could potentially be a rude awakening for many this year, let’s first cover some good news associated with tax filing:
- If you received one or both of the stimulus checks issued in 2020, you won’t have to pay taxes on it and you won’t have to claim it toward your earned income. The IRS does not consider stimulus checks as taxable income.
- Standard deductions increase from last year, per terms of the 2017 Tax Cuts and Jobs Act. In 2019, the standard deduction was $12,200 for single taxpayers and $24,400 for married couples filing jointly. This year, it increases to $12,800 and $24,800, respectively.
Now let’s get into some of the reasons why this tax season could be a bit more frustrating for you:
The new W-4 ushered in by the aforementioned Tax Cuts and Jobs Act was delayed in 2019, meaning that it was rolled out and took full effect in 2020. The new form essentially intends to minimize refunds and maximize take-home pay with each paycheck. In theory, this is the ideal situation, as any refund you receive during tax season is nothing more than an interest-free loan the government is now making good with you on. But the fact is that many Americans bank on tax refunds and may not have noticed a marginal increase in their checks throughout 2020. It could be a tough pill to swallow for many. To get an idea of how much this could impact you, compare your W-2s that were issued in 2020 versus those issued in 2019. If the amount of tax that was withheld was similar, then you’re still likely in store for a comparable refund. If there’s a noticeable gap, your refund could be much less. You can correct this issue for the forthcoming year by changing how much tax is withheld.
If you’re among the tens of millions of Americans that were – or still are – out of work due to the economic impact of the COVID-19 pandemic, know that the unemployment benefits that you received are not tax-free. While you should have had the option to withhold taxes when you filed for such benefits, if you didn’t, you’re going to be owing it come tax time. Not only could this eat into most of the refund that consumers could be expecting, but it could also mean that many Americans may have to cut a check to the IRS. This could put millions of Americans still reeling economically in an increasingly challenging situation.