7 Steps to Prepare for Tax Season

By midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. Well before the deadline, have you hunted and gathered all your documents, looked for a tax pro or software, and learned about any new tax credits or deductions you might be eligible for?

You should have received a Form W-2 by Jan. 31 or, with any mail delay, soon thereafter. The same deadline applies to certain 1099-MISC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by Jan. 31 as well.

Waiting until the last minute to prepare for tax filing is never advisable. If taxpayers work for one employer, their taxes may not be complicated, but if they have side gigs or they’re self-employed, tax returns can take a while to fill out.

7 Tax Prep Tips for 2021

Before taxpayers file, here are some tasks they need to do.

1. Decide on Hiring a Pro or DIY

Taxpayers can either prepare and file their taxes on their own or hire a professional. If they choose the latter, they can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro.

The costs for a professional vary, and the more complicated a return is, the higher the costs will be.

The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications.

If you’re going it alone, IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.

•  You can file on an IRS partner site if your adjusted gross income was $72,000 or less. This is a guided preparation, and the online service does all the math.
•  Those with income above $72,000 who know how to prepare paper forms and can do basic calculations can fill out and file electronic federal tax forms. (There is no state tax filing with this option.)

2. Collect Tax Documents

By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and 1099s for contract workers or freelancers.

Employers will send the documents in the mail or electronically.

Investors might receive these forms:

•  1099-B, which reports capital gains and losses
•  1099-DIV, which reports dividend income and capital gains distributions
•  1099-INT, which reports interest income
•  1099-R, which reports retirement account distributions

Other 1099 forms include:

•  1099-MISC, which reports payments in lieu of dividends
•  1099-Q, which reports distributions from education savings accounts and 529 accounts

If taxpayers won anything while gambling, they’ll need to fill out Form W-2G. If they paid at least $600 in mortgage interest during the year, they’ll receive Form 1098, whose information can be used to claim a mortgage interest tax deduction.

A list of income-related forms can be found on the IRS website.

Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used.

3. Look Into Deductions and Credits

Take the standard deduction or itemize deductions? The higher figure is the winner.

The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.

For tax year 2020, the standard deductions are:

•  $12,400 for a single filer
•  $24,800 for a married couple filing jointly
•  $12,400 for a married couple filing separately
•  $18,650 for a head of household

Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, health care deductions, and investment-related deductions.

The IRS notes that you may benefit from itemizing deductions if any of these apply:

•  Don’t qualify for the standard deduction.
•  Had large uninsured medical or dental expenses during the year.
•  Paid interest and taxes on your home.
•  Had large uninsured casualty or theft losses.
•  Made large contributions to qualified charities.
•  Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.

Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.

There are family and dependent credits, health care credits, education credits, homeowner credits, and income and savings credits.

Taxpayers can see the entire tax credits and deductions list on the IRS website.

4. Make a Final Estimated Tax Payment

Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change.

In 2020, the first two quarters of taxes were due on July 15. The third was due on Sept. 15, and the fourth was due on Jan. 15, 2021.

5. Apply for a Payment Plan If Needed

Another way to prepare for taxes is to apply for a payment plan with the IRS, if that seems necessary.

Just know that penalties and interest will accrue until you pay off the balance.

For the 2020 tax year the IRS issued revised COVID-related collection procedures . They include:

•  Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days.
•  Qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing substantiation or a financial statement if their monthly payment proposal is sufficient.
•  The IRS is offering flexibility to some taxpayers who are temporarily unable to meet the payment terms of an accepted offer in compromise (settlement of a tax bill for less than the amount owed).
With a long-term payment plan, taxpayers may pay taxes for a period of more than 120 days with monthly payments.

In general, the payment plans are available to individuals who owe $50,000 or less in combined income tax, penalties, and interest or businesses that owe $25,000 or less, combined, that have filed all tax returns.

A short-term payment plan has a $0 setup fee online, by phone or mail, or in person.

A long-term payment plan has a $31 setup fee online, or $107 by phone, mail, or in person. (The setup fee is waived for low-income payers.)

Taxpayers can pay for the plans on the IRS’s website.

6. Decide Whether to File for an Extension

If you need more time to prepare your federal tax return, you can electronically request an extension until Oct. 15 to file a return.

To get the extension, you must estimate your tax liability and pay any amount due by April 15 to avoid penalties.

7. Look Into CARES Act Provisions

The CARES Act was passed in March 2020 to help Americans during the COVID-19 crisis. The act included the Federal Pandemic Unemployment Compensation program, which gave people who were collecting unemployment compensation an extra $600 per week through July.

At the end of 2020, the president signed a $900 billion coronavirus relief bill, which gave people earning unemployment an extra $300 per week for up to 11 weeks.

Unemployment assistance does count as income, which means the base amount and the enhancements of $600 and $300 are taxable.

Most government agencies were to provide a paper copy of Form 1099-G, reporting unemployment compensation, by Jan. 31 of the year after the year of payment.

Other programs under the CARES Act aimed to assist struggling business owners. They include the Paycheck Protection Program, the Employee Retention Credit, Economic Injury Disaster Loans, and Payroll Tax Postponement.

The PPP program gave employers the chance to borrow up to 2.5 times their average monthly payroll, or up to $10 million, to cover workers’ paychecks. A forgiven PPP loan is not taxable under federal law, and business owners can deduct qualifying expenses paid with the money from the forgiven PPP loan, according to the U.S. Small Business Administration.

With Economic Injury Disaster Loans, business owners could borrow up to $2 million or they could receive a cash advance, which would not need to be repaid, up to $10,000. Emergency EIDL advances aren’t included in income, and taxpayers can deduct business expenses they paid using the advance, Bloomberg Tax notes.

The Employee Retention Credit , which gave employers a tax credit for keeping workers on the job, could reduce expenses that business owners would otherwise pay on their federal return and is not counted as income, according to the IRS.

Special Distribution Provisions

Another CARES Act provision provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.

The IRS lays out the rules in a piece titled “Coronavirus-related relief for retirement plans and IRAs, questions and answers.”

In general, an individual could take a distribution of up to $100,000 from employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs without the typical 10% additional tax on early distributions (before age 59½).

The provision also increases the limit on the amount that a qualified individual can borrow from a retirement plan. An IRA does not count. It permits a plan sponsor to offer qualified individuals up to one additional year to repay their plan loans, too.

The criteria for qualified individuals can be found on the IRS’s website, but it basically says that individuals who had the coronavirus or had a spouse or dependent with the virus, or who experienced financial hardship because of coronavirus would be eligible.

The Takeaway

“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable isn’t the best choice. Prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about new tax credits and deductions.

Still have questions about preparing for taxes? SoFi’s Tax Help Center can answer tax questions as they apply to investing, stock options, loans, college, and retirement accounts.

You can also find out more about coronavirus tax relief, check your tax refund status, and make a tax payment from the hub.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

Source: sofi.com

5 Strategies for Tax Planning Now and in Retirement

Long-term tax planning is one of the best things you can do to boost your income in retirement, however, it’s often overlooked. To change that, when thinking about tax planning, choose to think of it as tax saving instead.

Here are some moves you can make now and in retirement to better control how much money you owe come tax time.

1 of 5

To Save on Taxes Now, Lower Your Taxable Income

Money in a jeans pocket.Money in a jeans pocket.

When you contribute to a 401(k) or traditional IRA, you are reducing your taxable income for the year. The money you put into these accounts also grows tax deferred until you withdraw it in retirement. It’s not too late to reduce your tax bill for 2020; IRAs are unique in that you have until April 15 of this year to contribute and reduce your taxable income for 2020.

Besides the tax benefits you receive now, maxing out your contributions is an important part of increasing your retirement security. You can put away up to $19,500 in your 401(k) in 2020 and up to $6,000 in your IRA (and those limits are the same for 2021 as well).

If you are 50 and older, take advantage of catch-up contributions. You can save an additional $6,500 in your 401(k) and an extra $1,000 in an IRA. You should be taking a close look at your retirement accounts when you’re 50 years old to determine if you’re on track to meet your savings goals.

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To Save on Taxes in the Future, Diversify Your Tax Liability

A selection of many piggy banks in different sizes, shapes and colors.A selection of many piggy banks in different sizes, shapes and colors.

When looking at your retirement savings, it’s important to consider the types of accounts you’re saving and investing in. Tax-deferred accounts, like your 401(k) and traditional IRA, offer tax advantages now. You contribute money before taxes, but you will owe the IRS when you take money out in retirement.

Tax-exempt accounts, like a Roth IRA or Roth 401(k), offer tax advantages in the future. Your money is taxed before you contribute to the account, but you can withdraw it tax-free in retirement. Thanks to our historically low tax environment right now, we are focusing on converting clients’ traditional IRAs to Roth IRAs. You’ll pay taxes when converting to a Roth, which is why some people like to do a partial conversion. This means they are only moving as much money as they’re able to pay taxes on this year and moving more money next year.

Taxable accounts include your brokerage and savings accounts. You are taxed on the interest you earn and on any dividends or gains. Investment accounts are an important part of your overall financial plan, especially during your working years as you grow and accumulate your savings for retirement.

How much you contribute to your retirement accounts during your working years and the types of accounts you contribute to will impact how much you pay in taxes both now and in retirement. Diversifying your savings and investment accounts will help you better control your tax situation in retirement; you gain more flexibility on how much you withdraw and from which account.

3 of 5

Give to Charity

Cash is arranged to form a heart shape.Cash is arranged to form a heart shape.

The Tax Cuts and Jobs Act nearly doubled the standard deduction. As a result, fewer people are itemizing their taxes. With proper tax planning, there are new ways to donate to charity and still reap a reward. One strategy to consider is giving to donor-advised funds. Your contributions are invested and grow tax-free until you choose to donate to a qualified charity. Depending on your situation, contributing to a donor-advised fund could help you exceed the standard deduction, allowing you to itemize your deductions at tax time.

You may also consider using the bunching strategy. Instead of giving to charity every year, you can save your donations and give twice as much every other year. Let’s say you donate $10,000 to charity every year. If you started bunching this year, you will wait to make that donation and take the standard deduction on your taxes. Next year, you’ll donate $20,000 ($10,000 for 2021 and the $10,000 for 2022) and itemize your taxes that year. Bunching may or may not work for your personal situation, depending on how much you plan to donate and how close you are to having enough deductions to exceed the threshold for the standard deduction.

Bunching may also play in your favor if you’re donating to a donor-advised fund. Consider front-loading two years’ worth of donations and contributing to a donor-advised fund this year. Take as many itemized deductions as you can this year, and take the standard deduction next year. Talk with your financial adviser and your tax professional to find a strategy that works best for you.

4 of 5

Plan for RMDs

A woman gives two thumbs upA woman gives two thumbs up

Retirees need to take required minimum distributions (or RMDs) and pay taxes on that money starting at age 72. Some retirees don’t need the money from their RMDs and others don’t want to count the withdrawals toward their earned income for the year as it may bump them into a higher tax bracket. Qualified charitable distributions allow you to deduct your RMDs on your tax return if you give that money to charity. The money is transferred untaxed straight from your IRA to a qualifying charity, including non-profits and religious organizations. You must transfer the money directly to avoid paying taxes on the withdrawal; if you withdraw the money first and then write a check to a charity, you will owe the IRS.

Many retirees are unsure how much money they need to withdraw and when they need to withdraw it. It’s important to have a strategy for your RMDs well before your 72nd birthday. A financial adviser can help you plan for your RMDs so you don’t miss the deadline and pay a penalty.

5 of 5

Meet with a Financial Adviser

A woman talks with her financial planner via Zoom.A woman talks with her financial planner via Zoom.

It’s never too early to meet with a financial adviser. He or she will help you decide which types  of accounts to save and invest in and can help set savings goals to keep you on track. If you’re five to 10 years away from retirement and haven’t met with a financial adviser, this is the time to get serious about planning. A comprehensive plan will take into account taxes, Social Security, health care and estate planning.

Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.

Source: kiplinger.com

What’s the Standard Deduction for 2020 vs. 2021?

Taxpayers have a choice between taking the standard deduction or claiming itemized deductions when filling out their federal income tax return. And, of course, you’ll always want to pick whichever one is higher. As predicted, the number of American taxpayers claiming the standard deduction on their tax return shot up significantly after the 2017 tax reform law. Why? Because that law nearly doubled the standard deduction amount.

Before the tax reform law, about two-thirds of all taxpayers claimed the standard deduction. That jumped to almost 90% for the 2018 tax year, which was the first year for the enhanced standard deduction. Since then, the vast majority of American taxpayers have continued to claim the standard deduction on their tax return.

2020 Standard Deduction Amounts

So how much is the standard deduction worth? It depends on your filing status, whether you’re 65 or older and/or blind, and whether another taxpayer can claim you as a dependent. For the 2020 tax year, the standard deduction amounts are as follows:

Filing Status

2020 Standard Deduction

Single; Married Filing Separately


Married Filing Jointly


Head of Household


Taxpayers who are at least 65 years old or blind can claim an additional 2020 standard deduction of $1,300 ($1,650 if using the single or head of household filing status). For anyone who is both 65 and blind, the additional deduction amount is doubled.

If you can be claimed as a dependent by another taxpayer, your standard deduction for 2020 is limited to the greater of $1,100 or your earned income plus $350 (but the total can’t be more than the basic standard deduction for your filing status).

Returns for the 2020 tax year are due April 15, 2021.

2021 Standard Deduction Amounts

It’s never too early to start thinking about next year’s tax return. When you look at the table below, you’ll notice that the 2021 standard deduction is $150 higher than the 2020 amount for single taxpayers, married couples filing separate returns, and head-of-household filers. For married couples filing a joint return, the standard deduction rose $300 from 2020 to 2021.

Filing Status

2021 Standard Deduction

Single; Married Filing Separately


Married Filing Jointly


Head of Household


For 2021, taxpayers who are at least 65 years old or blind can claim an additional standard deduction of $1,350 ($1,700 if using the single or head of household filing status). Once again, the additional deduction amount is doubled for anyone who is both 65 and blind.

Just like 2020, the standard deduction for 2021 is the greater of $1,100 or earned income plus $350 if you can be claimed as a dependent on someone else’s tax return. But, again, the total can’t exceed the basic standard deduction for your filing status.

Source: kiplinger.com

8 Tax Tips for Gambling Winnings and Losses

An estimated 23.2 million people will plunk down a bet on the Super Bowl this year. And, of course, wagers aren’t just made on the outcome of the game between the Kansas City Chiefs and the Tampa Bay Buccaneers—you can bet on the length of the national anthem, whether the coin toss will come up heads or tails, which songs will be played at halftime, the color of the Gatorade dump on the winning coach and so much more. It’s a great day for serious and casual gamblers alike!

However, if you’re lucky enough to win some cash from a smart bet, don’t forget that Uncle Sam wants his cut, too. So, before you run out and spend your new-found fortune, here are 8 things to remember about taxes on gambling winnings and losses.

1 of 8

You Have to Report All Your Winnings

picture of man pulling in a pile of money on a tablepicture of man pulling in a pile of money on a table

Whether it’s $5 or $5,000, from an office pool or from a casino, all gambling winnings must be reported on your tax return as “other income” on Schedule 1 (Form 1040), line 8. If you win a non-cash prize, such as a car or a trip, report its fair market value as income.

And, please, make sure you report all your gambling winnings. If you won $500, report $500. The IRS isn’t hunting down small-time winners, but you still don’t want to think of yourself as a tax cheat.

2 of 8

You Might Get a Form W-2G

picture of tax form where you would attach form w-2gpicture of tax form where you would attach form w-2g

Generally, you’ll receive an IRS Form W-2G if your gambling winnings are at least $600 and the payout is at least 300 times the amount of your wager. The thresholds are $1,200 for bingo or slot machine winnings, $1,500 for keno winnings and $5,000 for poker tournament winnings (and the payout doesn’t have to be 300 times the wager for these types of winnings). Your reportable winnings will be listed in Box 1 of the W-2G form.

If a W-2G is required, the payer (sports betting parlor, casino, racetrack, etc.) will need to see two forms of identification. One of them must be a photo ID. You’ll also have to provide your Social Security number or, if you have one, an individual taxpayer identification number.

In some cases, you’ll get the W-2G on the spot. Otherwise, for this year’s winnings, the payer must send the form to you by January 31, 2022. In any event, if your bet was with a casino, we’re fairly certain you’ll get the W-2G. But if your bet was just a friendly wager with a friend … well, don’t count on it.

3 of 8

Withholding Might Be Required

picture of income tax form, calculator, pen and a pair of glassespicture of income tax form, calculator, pen and a pair of glasses

Generally, if you win more than $5,000 on a wager and the payout is at least 300 times the amount of your bet, the IRS requires the payer to withhold 24% of your winnings for income taxes. (Special withholding rules apply for winnings from bingo, keno, slot machines and poker tournaments.) The amount withheld will be listed in Box 4 of the W-2G form you’ll receive. You’ll also have to sign the W-2G stating, under penalty of perjury, that the information listed on the form is correct.

When you file your 1040 next year, include the amount withheld as federal income tax withheld (line 25c on your 2020 tax return). It will be subtracted from the tax you owe. You’ll also have to attach the W-2G form to your return.

Again, this is what to expect when you plunk down a bet at a casino or with some other legally operated gaming business … don’t expect your buddy to withhold taxes from the money you win from a friendly wager (although, technically, he or she should).

4 of 8

Your Losses Might Be Deductible

picture of unhappy gamblers at casino tablepicture of unhappy gamblers at casino table

Did you have a bad night at the blackjack table or pick the wrong team to win? There’s a silver lining if you lose a bet or two—your gambling losses might be deductible. (Gambling losses include the actual cost of wagers plus related expenses, such as travel to and from a casino.)

There are a couple of important catches, though. First, unless you’re a professional gambler (more on that in a second), you have to itemize in order to deduct gambling losses (itemized deductions are claimed on Schedule A). Since the 2017 tax reform law basically doubled the standard deduction, most people aren’t going to itemize anymore. So if you claim the standard deduction, you’re out of luck twice—once for losing your bet and once for not being able to deduct your gambling losses.

Second, you can’t deduct gambling losses that are more than the winnings you report on your return. For example, if you won $100 on one bet but lost $300 on a few others, you can only deduct the first $100 of losses. If you were totally down on your luck and had absolutely no gambling winnings for the year, you can’t deduct any of your losses.

If you’re a professional gambler, you can deduct your losses as business expenses on Schedule C without having to itemize. However, a note of caution: An activity only qualifies as a business if your primary purpose is to make a profit and you’re continually and regularly involved in it. Sporadic activities or hobbies don’t qualify as a business.

5 of 8

Report Winnings and Losses Separately

picture of sports betting tickets and cashpicture of sports betting tickets and cash

Gambling winnings and losses must be reported separately. Say, for example, you made four separate $100 bets on the Super Bowl. If one of those bets came through for a $500 payout, you must report the full $500 as taxable income. You can’t reduce your gambling winnings ($500) by your gambling losses ($400) and only report the difference ($100) as income. If you itemize, you can claim a $400 deduction for your losses, but your winnings and losses must be handled separately on your tax return.

6 of 8

Keep Good Records

picture of files in a filing cabinetpicture of files in a filing cabinet

To help you keep track of how much you’ve won or lost over the course of a year, the IRS suggests keeping a diary or similar record of your gambling activities. At a minimum, your records should include the dates and types of specific wagers or gambling activities, name and address/location of each casino you visited, names of other people with you at each casino, and the amounts you won or lost.

You should also keep other items as proof of gambling winnings and losses. For example, hold on to all W-2G forms, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by casinos.

7 of 8

Audit Risks May Be Higher

picture of tax form with the word "audit" stamped on itpicture of tax form with the word "audit" stamped on it

If you receive a W-2G form along with your gambling winnings, don’t forget that the IRS is getting a copy of the form, too. So, the IRS is expecting you to claim those winnings on your tax return. If you don’t, the tax man isn’t going to be happy about it.

Deducting large gambling losses can also raise red flags at the IRS. Remember, casual gamblers can only claim losses as itemized deductions on Schedule A up to the amount of their winnings. It’s a slam dunk for IRS auditors if you claim more losses than winnings.

Be careful if you’re deducting losses on Schedule C, too. The IRS is always looking for supposed “business” activities that are really just hobbies.

8 of 8

State and Local Taxes May Apply

picture of journal with "State and Local Income Tax" written in itpicture of journal with "State and Local Income Tax" written in it

If you look carefully at Form W-2G you’ll notice that there are boxes for reporting state and local winnings and withholding. That’s because you may owe state or local taxes on your gambling winnings, too.

The state where you live generally taxes all your income—including gambling winnings. However, if you travel to another state to plunk down a bet, you might be surprised to learn that the other state wants to tax your winnings, too. And they could withhold the tax from your payout to make sure they get what they’re owed. You won’t be taxed twice, though. The state where you live should give you a tax credit for the taxes you pay to the other state.

You may or may not be able to deduct gambling losses on your state tax return. Check with your state tax department for the rules where you live.

Source: kiplinger.com

7 Tax Benefits of Owning a Home: A Complete Guide for Filing This Year

What are the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes.

You may recall the Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. The result was likely a big change to your taxes, especially the tax perks of homeownership.

While this revised tax code is still in effect today, the coronavirus has thrown a few curveballs. For one, the Internal Revenue Service has delayed filing season by about two weeks, which means it won’t start accepting or processing any 2020 tax year returns until Feb. 12, 2021. (So far at least, the filing deadline stands firm at the usual date, April 15.)

In addition to this delay, many might be wondering whether the new realities of COVID-19 life (like their work-from-home setup) might qualify for a tax deduction, or how other variables from unemployment to stimulus checks might affect their tax return this year.

Whatever questions you have, look no further than this complete guide to all the tax benefits of owning a home, where we run down all the tax breaks homeowners should be aware of when they file their 2020 taxes in 2021. Read on to make sure you aren’t missing anything that could save you money!

Tax break 1: Mortgage interest

Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.

“However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.

Why it’s important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.

“The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this online mortgage calculator.)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled.

And note that those amounts just increased for the 2020 tax year. For individuals, the deduction is now $12,400 ($12,200 in 2019), and it’s $24,800 for married couples filing jointly ($24,400 in 2019), plus $1,300 for each spouse aged 65 or older. The deduction also went up to $18,650 for head of household ($18,350 in 2019), plus an additional $1,650 for those 65 or older.

As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick.

For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you’re a married couple under 65 who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $1,200 by itemizing.


Watch: Ready To Refinance? Ask These 5 Questions First


Tax break 2: Property taxes

This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. (Here’s more info on how to calculate property taxes.)

Why it’s important: Taxpayers can take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service.

Just note that property taxes are on that itemized list of all of your deductions that must add up to more than your particular standard deduction to be worth your while.

And remember that if you have a mortgage, your property taxes are built into your monthly payment.

Tax break 3: Private mortgage insurance

If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan.

But here’s some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019—aka the Setting Every Community Up for Retirement Enhancement (SECURE) Act—which reinstated certain deductions and credits for homeowners.

“These include the deduction for PMI,” says Laura Fogel, certified public accountant at Gonzalez and Associates in Massachusetts. (This credit is retroactive, so talk to your accountant to see if it makes sense to amend your 2018 or 2019 tax return in case you missed it in past years.)

Also note that this tax deduction is set to expire again after 2020 unless Congress decides to extend it in 2021.

Why it’s important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,800 standard deduction for married couples under 65. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!

Tax break 4: Energy efficiency upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around (but not for long). The credits for solar electric and solar water-heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.

The SECURE Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors, and insulation,” says Fogel.

Why it’s important: You can still save a tidy sum on your solar energy. And—bonus!—this is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between Jan. 1, 2020, and Dec. 31, 2020, 26% of the expenditure is eligible for the credit (down from 30% in 2019). That figure drops to 22% for installation between Jan. 1 and Dec. 31, 2021. As of now, the credit ends entirely after 2021.

Tax break 5: A home office

Good news for all self-employed people whose home office is the main place where they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.

For those who can take the deduction, understand that there are very strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.

The fine print: The bad news for everyone forced to work at home due to COVID-19? Unfortunately, if you are a W-2 employee, you’re not eligible for the home office deduction under the CARES Act even if you spent most of 2020 in your home office.

Tax break 6: Home improvements to age in place

To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.

The fine print: You’ll need a letter from your doctor to prove these changes were medically necessary.

Tax break 7: Interest on a home equity line of credit

If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS. So you’ll save cash if your home’s crying out for a kitchen overhaul or half-bath. But you can’t use your home as a piggy bank to pay for college or throw a wedding.

The fine print: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined. (And if you took out a HELOC before the new 2018 tax plan for anything besides improvements to your home, you cannot legally deduct the interest.)

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

Democrats Will Get to Taxes and Health Care Soon Enough — What It Will Mean for Your Pocketbook

In early January, a much-anticipated runoff election in Georgia answered the question of which political party would control the Senate for the next two years: Democrats Jon Ossoff and Raphael Warnock clinched the two seats up for grabs, delivering the Senate a 50-50 split between Democrats and Republicans. Vice President Kamala Harris casts tie-breaking votes on legislation, giving Democrats an ef­fective majority. Senate Majority Leader Chuck Schumer determines the schedule for votes on legislative proposals.

With President Joe Biden in the White House and a narrow Democratic majority in the Senate and House of Representatives, Democrats have a clearer path to enact their agenda. In the near term, Biden and Congress are expected to focus on urgent matters of the economy and the pandemic, such as stimulus aid for struggling Americans and coronavirus vaccine distribution. Infrastructure and climate change are top issues, too. And at some point, policymakers will likely tackle other reforms that hit your pocketbook, including taxes and health care.

But Democrats won’t enjoy smooth sailing all the way. Legislation requires a simple majority of votes to pass in the House, but most types of bills must gain 60 votes to make it through the Senate. (Legislation involving spending and revenue—including many tax proposals—may pass the Senate with 51 votes through a procedure known as budget reconciliation.) And with slim majorities in both chambers of Congress, Democrats may not be able to overcome divisions within the party on some progressive issues. Bipartisan support will play a role in the policies that come to fruition in the next couple of years.

Taxes. Tax relief may appear in a new round of stimulus legislation, says Garrett Watson, senior policy analyst for the Tax Foundation. That is expected to include expanding the child tax credit, which Biden has proposed temporarily increasing from a maximum of $2,000 per child to $3,600 per child age 5 or younger and $3,000 per child age 6 up to age 17 (for married couples with incomes of up to $400,000). That proposal has support among some Republican senators. Biden also wants to raise the limit of eli­gible child care expenses for the child and dependent care tax credit to $8,000 per child, or up to $16,000 for multiple kids. And he has proposed extending the earned income tax credit to workers 65 or older with no qualifying children (kids must live with you most of the year and fall within certain age groups to be eligible). The credit is currently available to low- and moderate-income workers. In 2021, it’s worth a maximum ranging from $543 for workers ages 25 to 64 with no qualifying children to $6,728 for families with three or more qualifying kids 18 or younger (or 23 or younger for children who are full-time students).

Further down the road, Democrats may pursue tax hikes for those with incomes higher than $400,000. But tax increases won’t likely materialize before the pandemic recedes and the economy stages a strong recovery. Restoring the top marginal income tax rate to 39.6%—up from the current 37% set by the 2017 Tax Cuts and Jobs Act—is one of the more likely possibilities, says Watson. Biden has also proposed capping itemized deductions to 28% of their value for high earners (no limit applies currently), taxing long-term capital gains at the ordinary top income tax rate (from the current maximum of 20%) for those with incomes higher than $1 million, and eliminating the step-up in basis for taxation of inherited stocks, mutual funds and other assets (currently, the cost basis is “stepped up” to the assets’ value at the date of the original owner’s death rather than the purchase date). But congressional Democrats must come to near-unanimous agreement to pass such measures if they gain no Republican support.

Health care. Moves that modify and protect the Affordable Care Act have the best shot of getting passed. Democrats are most likely to succeed at making changes in a few areas, says Cynthia Cox, vice president at the Kaiser Family Foundation. Those include increasing the income limits to qualify for subsidies that reduce premiums on health care plans through the exchanges, calculating those subsidies based on “gold” plans (which provide more-generous coverage than silver plans, the current basis), and making subsidies on exchange plans more widely available to those who have the option of getting insurance through their job (currently, you don’t qualify for a subsidy if an affordable job-based plan is available to you through your own employment or that of a spouse). Lawmakers may also try to nullify a case the Supreme Court heard last fall—which claims that the ACA became unconstitutional when the 2017 tax law lowered to zero the penalty for being uninsured—by reinstating a modest penalty. And there’s bipartisan interest in lowering prescription-drug prices.

Biden campaigned on offering a public health insurance option, which would be available alongside private and employer plans, and lowering the Medicare age of eligibility from 65 to 60. But those proposals face larger hurdles, including disagreement within the Democratic Party.

Biden by the numbers

Consider the estimated impact of Biden tax proposals on federal revenue over the next decade:

  • Increase top tax rate to 39.6%: $148.1 billion
  • Limit itemized deductions for high earners: $283.5 billion
  • Expand child tax credit: –$105.5 billion*
  • Expand child and dependent care credit: –$80.7 billion

*Reflects revenue change for 2021 only, based on potential expiration of the expanded credit

Source: Tax Foundation

Source: kiplinger.com

Standard vs. Itemized Deduction: Which One Should You Take?

Standard versus itemized deduction: Which one should you claim? This question may be weighing heavily on your mind as you prepare to file your taxes. Especially since the standard deduction once again changed in 2020, the final change to the new tax reforms that took effect in 2018. So let this guide help you decide which deduction is best for you.

Itemizing your deductions—particularly if you’ve bought a home recently—could save you major bucks when you file. But, more than ever, you need to understand what you can and can’t do tax-wise. We’ll break it down to help you make the decision on whether to select a standard or an itemized deduction.

What is the standard deduction?

The standard deduction is essentially a flat-dollar, no-questions-asked reduction to your adjusted gross income. When you file your tax return, you can deduct a certain amount right off the bat from your taxable income.

The standard deduction nearly doubled as a result of the Tax Cuts and Jobs Act, which went into effect in 2018. For 2020, the standard deduction went up once again for everybody. It is now $12,400 for single filers and $24,800 for married couples filing jointly. (Take note that the rates will jump again in 2021.)

Here are some of the benefits to taking a standard deduction:

  • It allows you a deduction even if you have no expenses that qualify as itemized deductions.
  • It eliminates the need to keep records and receipts of your expenses in case you’re audited by the IRS.
  • It lets you avoid having to track medical expenses, charitable donations, and other itemizable deductions throughout the year.
  • It saves you the trouble of needing to understand the fine nuances of tax law.

What are itemized deductions?

Although claiming the standard deduction is easy and convenient, choosing to itemize can potentially save you thousands of dollars, says Mark Steber, chief tax officer at the Jackson Hewitt tax service.

“Don’t be lulled into thinking the standard deduction is always a better answer,” Steber says. That advice especially applies to homeowners.

“Buying a home has the single largest impact on your tax return,” he adds, noting that a home purchase is “an anchor item that can move someone into the itemized taxpayer category.”

Itemizing your deductions may enable you to deduct these expenses:

  • Home mortgage interest (note the exceptions below)
  • Real estate and personal property taxes (note the cap below)
  • State and local income taxes or sales taxes (but not both)
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical and dental expenses
  • Unreimbursed employee business expenses

Why itemizing often makes sense for homeowners

Under the new law, current homeowners can continue to deduct interest on a total of $1 million of mortgage debt for a first and second home that was bought before December 16, 2017. But buyers who purchased a home after that date can still deduct interest, but the amount drops to $750,000 for a first and second home.

It’s still possible that if you own a home, your mortgage interest alone might exceed the standard deduction, says Steve Albert, director of tax services at the CPA wealth management firm Glass Jacobson. In this case, it’s a no-brainer to itemize your deductions.

This is particularly true if you bought a house recently, since most mortgages are front-loaded to pay mortgage interest rather than whittle down the principal (which is the amount you borrowed).

For instance: If you have a 30-year loan for $400,000 at a fixed 5% interest rate, in the first year of your mortgage, you’ll pay off only $5,901 in principal and a whopping $19,866 in interest.

That alone exceeds an individual’s standard deduction of $12,400 deduction for 2020. So if you’re filing taxes this year, itemizing would make total sense.

Plus: If you bought your house in 2020 and paid points—which are essentially a way to prepay interest upfront to lower your monthly mortgage bills—these points count as mortgage interest, too, amounting to more tax savings.

On the other hand, if you’ve owned your home for a while, then your mortgage interest may not amount to much. By the 25th year of that same $400,000 loan, you’ll pay only $6,223 in interest.

However, keep in mind that your property taxes of up to $10,000 are an itemized deduction, too—and combined with mortgage interest and other deductions, could push you over the top into itemizing territory.

Itemized vs. standard deduction: Which is right for you?

Not sure how much you paid in mortgage interest and property taxes last year? To get a ballpark, you can punch your info into an online mortgage calculator.

Also, early in the new year, your mortgage lender should have mailed you a mortgage interest statement (Form 1098) showing the total you paid during the previous year.

“And if you had your property taxes impounded in your loan, your taxes will appear on your 1098 as well,” says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.

Another DIY approach for seeing whether your combined itemized tax deductions are higher than your standard tax deduction is to fill out the IRS Schedule A form, which outlines all federal itemized deductions line by line.

You can also consult an accountant (you can search for a tax professional in your area using the IRS directory of tax return preparers). But as a general rule, if you bought a home recently, you could be a prime candidate for itemizing, so don’t let these potential savings pass you by without checking!

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com