In case you forgot, tax season is creeping up on us again. 2020 was a bizarre year for all of us, and your taxes this year might reflect that. Don’t get caught doing your taxes last minute! Here are 4 Tips for Filing Taxes in 2021.
- Get organized
Start a filing system for all of your documents. Keep all the transactions and receipts that can affect your tax return in 2021. It’s important to stay organized so that you don’t lose anything and you don’t forget items from months ago. Be aware that the last day for filing taxes in 2021 is April 15.
- Figure out your bracket
To estimate how much in taxes you owe this year, you need to find out what tax bracket you belong to. The U.S. has a progressive tax system, and the rate at which you are taxed ranges from 10%- 37% of your annual income. This is not a flat rate because each individual tax bracket is taxed at the rate set for the bracket. The tax brackets are as follows:
- 10% for incomes less than $9,875
- 12% for incomes more than $9,875
- 22% for incomes more than $40,125
- 24% for incomes more than $85,525
- 32% for incomes more than $163,300
- 35% for incomes more than $207,350
- 37% for incomes more than $518,400
Be aware of the fact that unemployment benefits are taxable income.
- Learn about the deductions and credits you can apply for
A deduction is an expense that you’ve had during the year that you can subtract from your taxable income. A tax credit is an actual dollar-to-dollar reduction in your tax bill. Many of the same deductions and credits apply from last year. Some popular ones to be aware of include:
- Child Tax Credit – If you have a child who you can claim as a dependant, you can get up to $2,000 per child. If you end up having $0 to pay in taxes this year, you can even get a credit of $1,400 from the IRS.
- Earned Income Tax Credit – If you earned less than $56,844 last year, you might be eligible for the EITC, which can give you $538 to $6,660.
- Business Expenses – Those who are self-employed can claim expenses on their tax return, ranging from rent, travel expenses, and office supplies.
- Medical Deductions – If you’ve spent time in the hospital because of the pandemic or any other reason, you can deduct anything over 7.5% of your adjusted gross income.
- Charitable Deductions – The CARES Act allows you to deduct up to 100% of your adjustable gross income from your taxes.
- Education – The American Opportunity Credit (AOC) allows you to deduct $2,500 from your taxes if you are in your first four years of college. If you are past that, you can deduct up to $2,000 as part of the Lifetime Learning Credit.
- The stimulus check and the CARES Act Relief Fund count as a credit this year and not as a deduction from your taxes.
- The PPP loan acts as a deduction that you can use on any expenses paid from the loan from your taxable income.
- Retirement funds
There are generally two different retirement funds out there, the 401(k) and the IRA, and you should be aware of how they affect your taxes. Money put into a 401(k) won’t get taxed by the IRS. However, the IRA works a little differently depending on if you have a traditional or Roth IRA. With a traditional IRA, you don’t pay taxes on your deposits, but you pay taxes on your withdrawals. Roth IRAs are the opposite: you pay taxes on what you put in, but not on what you take out.
These tips should make filing your taxes this year just a little less difficult. If you need more tax help, remember to seek out a professional to avoid costly mistakes.