Unless your taxes are very straightforward (where you are just copying information from your W-2), you should probably consider using a professional tax preparer. The pandemic caused Congress to change tax laws last year and your preparer is probably aware of the changes. Remember: Usually only credentialed tax professionals such as CPAs, Enrolled Agents and attorneys are permitted to represent you before the IRS if you’re audited, so don’t ask friends or family members to prepare your tax return for you. Besides, professional tax advisors are often willing to pay any penalties resulting from their errors. Will your brother-in-law do that?
Here are some items you might want to discuss with your tax advisor.
Contributions to IRAs
You can fund your 2020 IRA until April 15. The contribution limit is based on your income (the maximum is $6,000; $7,000 if you’re age 50+). Married with no income yourself? You can fund a spousal IRA.
CARES Act Distributions
If you withdrew money from your retirement accounts in 2020, the CARES Act lets you pay just a third of the tax you owe on your 2020 tax return. (You’ll pay the rest on your 2021 and 2022 returns.) Pay it all in 2020 or spread it over three years? Ask your tax preparer. Note: Custodians coded the distribution as a regular distribution, so you and your tax professional must file with correct notations to reflect the CARES Act.
Unemployment income received in 2020 is taxable and must be reported on your 2020 tax return.
Economic Impact Payments
Economic Impact Payments under the CARES Act are not considered income. You will not owe taxes on that money.
If you itemize deductions on your tax return, you can deduct all the cash you donated to qualifying charities, up to 100% of your Adjusted Gross Income. If you take the standard deduction on your tax return, you can deduct up to $300 in cash donations.
Did you give anyone (not a charity) more than $15,000 in 2020? If so, your tax preparer likely needs to file Form 709 with your tax return.
W-2 and 1099 Forms
Your employer will send you a form related to your earned income. This will be a W-2 for employment income or a 1099 for self-employment income. You may also receive Form 1099 from each financial institution where you have accounts, such as banks and brokerage firms.
Required Minimum Distributions
RMDs were waived for 2020 (RMDs generally apply to certain retirees or individuals who have inherited a retirement account). If you took an RMD within the past 60 days and now wish you didn’t, you can put the money you withdrew back into an IRA, provided you haven’t done an IRA rollover in the last 365 days.
For more information on RMDs: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.