With 2020 nearly behind us (thank goodness), we’re turning our attention toward 2021—and all the potential it has in store for us. Unfortunately, along with all that potential comes some serious consequences for taxpayers who might find themselves susceptible to making certain tax mistakes.
This tumultuous year has brought plenty new economic factors into the equation for the average taxpayer—and navigating them can serve as a major challenge.
Whether you’re an individual taxpayer looking to get your taxes right or you own a business that’s navigating the rough waters of 2020, avoid these tax mistakes. After this turbulent year, the last thing you want in 2021 is a tax bill.
Unfortunately, 2020 was a rough year for many taxpayers. You may count yourself among the millions of job losses. While we hope you were able to find new work and a sustainable income—or get rehired by your old employer—in the interim, you may have filed for unemployment.
Unemployment insurance can serve as a key bridge between jobs. However, many don’t have many (or any) experience with it, so they don’t understand how it affects their taxes. And due to the unique circumstances of the pandemic, federal and state governments made even more unemployment available. So the risk of making a mistake that can cost you later has risen.
Most state unemployment insurance is not taxable on a state level. But, it is likely that the IRS will tax it as income. If you haven’t withheld any of your unemployment income, you may end up with an unexpected tax bill.
One of the surest mistakes you can make on the path to a surprise tax bill or audit? Disorganization. And before you skip on to Tax Mistake #3, let us explain why.
Disorganization can impact your taxes in a few ways. First, it severely impacts your stress levels throughout tax filing season. Knowing you need to find x, y, and z tax form or receipt puts you on your heels from the moment you decide to file. All too often, this results in taxpayers putting off filing for far too long. It can even cause you to miss the tax filing deadline and accrue penalties and interest on your tax bill.
Disorganization also tends to reveal itself in your tax return itself. Specifically, in the potential for errors. When you lack organization, numbers get missed and details, omitted. These mistakes lend themselves to IRS audits.
If there was one single transformation for many U.S. workers in 2020, it was the shift from in-person work to remote work. For those lucky enough not to be impacted by job losses or cuts, the ability and necessity to work from home amidst the pandemic radically changed the way workers operated throughout the year.
Many took the opportunity to move out of major cities or to bank some quality time with their families living elsewhere in the country. However, many may not have truly recognized the potential impact this might have on their tax obligations.
When you work remotely in another state, you may also fall under that state’s income taxes. And this can place an additional tax burden onto your plate that you didn’t anticipate. Unfortunately, in most of these remote work situations, it won’t fall onto your employer’s shoulders to deal with the specifics of your new tax obligation—nor will they necessarily give you guidance on how to file. And if you forget to pay taxes in a state where you worked, you may potentially find yourself on the receiving end of that state’s attempts to collect.
Finally, we’ve reached one mistake without serious consequences. Along with other economic relief measures, 2020 saw one $1200 stimulus payment, and it’s looking like we may see another stimulus of at least $600. But are these payments taxable?
That question has floated around for quite a while and runs the risk of mucking up your calculations when preparing your tax return. Like we mentioned, you won’t leave yourself on the hook to pay more taxes, but we advocate for getting things right the first time. So the more information you have, the better.
In short, stimulus payments aren’t taxable. Without getting too deep into the complexities of how they’re classified from a tax perspective, just know that you won’t need to factor them into your income when preparing your tax return for the 2020 tax year. But do make a point not to include them on your tax return as income. While it’s likely that the IRS would add that toward your refund, you don’t want to run the risk that something slips by and you leave money on the table.
For many business owners, 2020 marked a completely unprecedented—and frankly, unwelcome—shift in usual operations. Restrictions and eliminations of service replaced the business-as-usual operations. And many businesses that rely on in-person patronage, such as restaurants, bars, and gyms, found themselves bearing the worst of the economic fallout from the pandemic.
During the early congressional attempts at economic relief, PPP Loans helped offer these and many thousands of other businesses temporary relief from the worst economic consequences. However, these new loans added a certain sense of confusion to the equation, as many business owners still don’t know exactly how this money may factor in on their tax returns.
If you received a PPP Loan, the biggest mistake you can make for your 2021 business tax return remains not accounting for that loan. While your loan may be forgiven, the expenses you deduct can fluctuate a bit depending on the state in which you reside. As we said, there’s a lot of confusion, and we expect the IRS to clarify some of this moving forward. But make sure to follow up with your state-level tax collection agency for further guidance.
Of all years to make tax mistakes when filing your return, 2021 shouldn’t become one of them. Fortunately, we know enough by now to help you avoid that unfortunate fate.
Instead, just keep in mind the 5 biggest tax mistakes you should correct before the new year. From there, all you need to do is file. And we’re always here to help.
Need any help understanding the tax landscape for your 2021 tax return? We’ve helped hundreds of taxpayers to understand their taxes amidst the coronavirus pandemic. Get in touch with us today by phone or through our live chat.
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