The Ultimate Guide to Filing Taxes in 2021

Congratulations. You’ve officially made it to 2021! Or actually, perhaps we should rephrase since we’re over two months into the year. Instead, we should say you’ve officially made it to the 2021 tax season. But oddly enough, for the same reasons you might be excited about having 2020 in the rearview mirror, you might have good reason to dread filing taxes in 2021.

Sadly, the coronavirus pandemic has left a much wider impact than in terms of the serious losses and health emergency it dealt the U.S. and the world at large. Covid turned millions upon millions of lives upside down, from job losses and layoffs to a complete transformation of work. For some, the financial ramifications of Covid may extend for years.

A completely new economic crisis means a completely new financial landscape come tax time. Many taxpayers find themselves facing entirely new obstacles when it comes to their tax situation. And it’s time we talk about it.

The pandemic has provided new challenges for taxpayers, from unemployment and remote work to economic payments and entirely new tax credits. However, with the right instruction, you can turn these challenges into opportunities when filing taxes in 2021. And into major tax savings.

At Edge Financial, we keep our ears to the ground when it comes to the latest tax information from the IRS. From the beginning of the pandemic a year ago, we started compiling the relevant financial information and how it could impact you. Our clients have bravely faced the challenge, but we’ve all learned a few things in the process. And most of them fit into our preexisting belief that knowledge remains the best asset when dealing with the IRS.

So we’re going to empower you with the knowledge to face the uncertainty of your 2020 tax return in the 2021 tax season. Coronavirus has dealt enough blows so far; you shouldn’t have to face any additional ones when it comes time to file your taxes.

So here, we’ll walk you through everything you need to know about your 2020 tax return. We’ll cover topics like economic relief payments, unemployment, and child tax credits. From economic payments to remote work—and considerations you should make when filing your taxes in 2021—we’ve got you covered.

Let’s dive in.

Stimulus Payments

One of the most perplexing issues of the 2020 tax landscape remains the two stimulus payments, or stimulus payments, sent out between April and December of last year. Many people don’t quite know what to make of them, which is exactly why the IRS has sent out some guidance around these payments recently.

In order to make sense of the situation regarding economic relief payments, we’ll first walk through the two stimulus payments in general. Then, we’ll explain how they factor into your taxes and what you might need to do about them.

Stimulus Payments: The Basics

As of March 2021, we’ve had three total stimulus payments. And two of them fell in 2020. So what do you need to know about them? Will the IRS tax these payments? Do you need to report them on your tax return at all? We’ll walk you through everything there is to remember for your economic stimulus payments.

“Are my economic relief payments taxable?”

Short answer: No.

Slightly longer answer: No, your economic relief payments aren’t taxable.

See what we did there? The IRS won’t tax your stimulus, which may come as a relief to some people. And we can’t blame you. With payments of $1200 and $600 directed to millions of Americans, it should come as no surprise that many had to ask whether or not these payments would be taxed by the IRS.

Luckily, the IRS will not tax these payments. So, if you received $600, $1200, or a higher amount as a joint filer, you can rest easy that you won’t owe some portion of these stimulus payments right back to the IRS.

Unemployment Insurance

As the pandemic closed down businesses, many businesses decided to lay off some or all of their employees. Large companies and small businesses alike furloughed or laid off millions of their workers, resulting in huge increases in unemployment claims.

If you’ve ever filed for unemployment benefits before, you might have an idea of how states and the IRS tax your benefits. But if 2020 marked the first year you’ve ever needed to file, you might find yourself in entirely uncharted waters. And those waters were extra choppy in 2020.

For many, federal unemployment benefits from the first relief package stacked on top of state benefits, yielding much higher unemployment income than folks might receive in an average year. But while most states won’t tax their state unemployment benefits as income, the IRS typically will.

For example, let’s say you live in California, and you file for unemployment insurance. Based on your previous income, you hit the state cap for weekly benefits: $450. Whenever you submit your certification for benefits, you’ll have the option to withhold 10%, or $45, for federal taxes. But if you spend 10 weeks between jobs without checking that box, you’ll be on the hook for $450—equaling an entire week of your unemployment benefits—with the IRS.

A lack of understanding about how the IRS taxes state and federal benefits has left some taxpayers with unexpected tax bills in 2021. And if you experienced a job loss in 2020, that’s the last thing you need. Fortunately, in the American Rescue Plan, a tax credit will wipe out a big chunk of that potential debt stemming from unemployment benefits.

The Unemployment Tax Credit

The American Rescue Plan offers federal tax relief to those who collected unemployment benefits, up to a point. Specifically, the legislation waives federal tax on up to $10,200 in unemployment benefits per person in 2020.

However, if you earned $150,000 or more, you can’t take the credit. That includes married couples who file jointly. But if you and your spouse file separately—or both claimed unemployment in 2020, you might benefit more from filing taxes in 2021 separately rather than jointly.

Let’s dive into that a bit more. Your goal in claiming this unemployment tax break should remain the same as your goal on your taxes every year. You want to minimize your tax obligation by maximizing your tax breaks. So, if your income with your partner collectively totals more than $150,000, you might be leaving $10,200 in tax breaks on the table by filing jointly rather than separately.

However, if your joint income falls below $150,000, you can take the tax credit regardless, so filing jointly may remain your best financial option. And even if you do collectively earn more than $150,000 and filing jointly might exclude you from taking the tax credit, it might still benefit you more to take the credit. Most married couples will still benefit more from filing jointly. On the other hand, if you both filed for unemployment, your potential tax benefit rises to $20,400. So you’d need to take that into account for your decision to file a single or joint return.

Tax Filing in 2021: Child and Dependent Care Credit

The American Rescue Plan didn’t just give taxpayers some federal relief through the unemployment tax credit. Parents and those providing care to one or more dependents have something to cheer about, too. The plan offers an enhanced child and dependent care credit for 2021. Here’s how the expansion of benefits can help you and your family.

The Credit for 2020

For 2020, you can claim the child and dependent care credit if you paid someone to care for your child so that you or a spouse could work or search for work. Essentially, the credit counts as a percentage of some work-related expenses you paid for someone to take care of your child. It starts at 35% but slowly slides down—to 20% at minimum—by a single percentage point for every $2,000 your Adjusted Gross Income falls about $15,000. So if your AGI sits at $35,000, the value of the credit will drop by 10%. Your credit will apply to 30% of expenses.

Other rules apply, most notably the fact that the credit is non-refundable. This means that if you take the credit, you can only reduce your tax obligation to zero—not below. You won’t get a refund.

The Credit for 2021

For the taxes you file next year—which apply to 2021—you’ll have access to a number of critical benefits you don’t have in 2020.

  1. The credit is refundable. So if your tax liability totals $1000 and the credit has a value of $1,200, you can get $200 on your refund.
  2. The American Rescue Plan raises the credit limit from 35% to 50%.
  3. More expenses apply to the credit. Instead of up to $3,000 in expenses for one child ($6,000 for two or more), now you can claim up to $8,000 in expenses for one child ($16,000) for multiple kids.

Tax Filing in 2021: Remote Work

The pandemic didn’t just cause job losses. For many who work in offices, the pandemic led to a complete transformation of how—and where—you performed your work. Many businesses went partly or entirely virtual, expanding or creating new work-from-home policies for remote work. But did you know that remote work can impact your taxes?

You bet it can.

Now, many taxpayers won’t have to deal with any tax implications from working remotely. If you spent March onward working from your makeshift office in the dining room, then you probably can skip this section entirely. But if you decided to quarantine with family across the country or move out of your expensive apartment and into a cheaper one in another state, you could have a hidden tax bill waiting for you.

Here’s how it works. And yes, the rules are confusing and inconsistent. We’re here to help.

  1. Regardless of where you work, you will owe the IRS income tax. So it doesn’t matter if you live in Hawaii or in Minnesota. When you work, you will pay federal income tax.
  2. Regardless of where you work, you will owe the state in which you live. So if you live in California, California will tax your income. And even if you live in California but work out of state for three months, California will still tax your income.
  3. Some states tax you just for working remotely in their state, even if you technically “live” in a different state.

Number three is the part that is throwing a wrench into some taxpayers’ lives right now.

Filing Taxes in 2021: Extra Considerations

We wish the confusion ended with all these big financial considerations and new credits you need to keep in mind on your taxes. But the hits just keep coming! Due to the ongoing pandemic, how you physically file your taxes—and some of the important dates for tax season—have changed. Here’s what you should keep in mind.

Tax Deadline

The IRS has officially pushed the tax deadline back by about a month. So rather than filing your taxes in mid-April, you’ll have until mid-May to file.

The new tax deadline for filing your 2020 tax return: May 17th.

This move might not come as too big a surprise to you, as the IRS similarly kicked back the tax deadline last year by three months—from April to July. However, this tax deadline push obviously has less to do with a dramatic change in our collective lifestyle as we saw in March of last year. However, it should come as a welcome surprise for anyone who might still be scratching their heads, trying to figure out their unusual income situation for last year.

A couple of reminders for the new tax deadline:

  • Don’t wait until the last minute. We’re not judging here. But we know that for taxpayers who have a tendency to wait until the last minute to file, a postponed tax deadline can lull them into a false sense of security. Rather than getting things organized, they wait until the last minute—again. And they end up with exactly zero of the benefits they should get from a delayed tax deadline in the first place.
  • Pay your taxes on time. If you still need time to work through the nuts and bolts of your tax return, you can file for a tax extension. This will give you an extra 6 months to file. However, this won’t set back the clock on actually paying your taxes if you owe them. So if you have any suspicion that you might owe, make sure you pay the IRS by May 17 so you don’t accrue penalties.

Physically Filing Taxes

Fortunately, actually filing your taxes this year won’t be as difficult as in 2020. But you may still need to proceed with caution, so we’ve compiled a few tips for filing your taxes in 2021.

Last year, Covid shut down a vast majority of businesses down for a period of months. And this included many brick-and-mortar tax preparation companies and government supported tax prep centers. While tax prep companies, like H&R Block and Jackson Hewitt, charge for their services, other IRS-approved centers provide low income, senior, and veterans filers and veterans with tax assistance free of charge.

This left many taxpayers in a bind last year. Since then, many businesses and government offices, like DMVs and taxpayer assistance centers, have adjusted and started to reopen more safely. So if you qualify for free assistance on your taxes, you may have greater flexibility to schedule an in-person appointment. To find out more information about locations near you, just visit the IRS website.

Filing Taxes in 2021: The Advantages of Tax Prep Services

Obviously we’re biased, but we think tax prep services (Yes, like Edge Financial…) hold some unique advantages in the 2021 tax season.

For some, working with a tax prep service might usually mean visiting a brick and mortar business. And for some people, that may not be the move you’re most comfortable with during the 2021 tax season. But while tax prep companies like us have already perfected the virtual tax filing process, we also think that tax preparation services carry some advantages this year.

1. They know the tax laws that apply to you.

If you haven’t gathered by now, tax filing in 2021 will probably take the cake as the most complicated tax filing season in most taxpayers’ memories. Significant changes in employment and income last year coupled with multiple economic relief packages. New tax credits have sprung up—but not just on a federal level.

Local and state governments have also passed various relief packages for individuals and businesses. And they all have different tax implications. Working with a tax prep company that knows the ins and outs of state taxes and local relief can help you avoid a tax bill and keep those benefits.

2. They can maximize your credits & deductions.

We believe that filing a good tax return is just as much an art as it is a science. The unemployment tax credit makes for a perfect example.

If you’re married, you usually maximize your tax benefit by filing jointly. However, when a $10,400 tax credit gets thrown on the table, things might change. If your combined income is too high for 2020, you might miss out on that $10,400 tax credit by filing jointly. But perhaps you’d collectively still gain more benefit by filing together!

Things get messy, and you deserve to get every last cent you can out of your tax return this year. Working with an expert tax preparation service will allow you to do just that when filing taxes in 2021.

3. They will assist you in the case of an audit.

As if tax filing in 2021 hasn’t given enough people headaches already, the confusion and tax surprises have the potential to lead to IRS audits. And a good tax preparation service will stay by your side throughout the audit process take place.

Of course, a confusing tax filing landscape doesn’t make for the only reason you might find yourself staring down an audit. While working with a pro can help minimize the errors you might make on your own, many things can lead to an audit that aren’t in your control.

A professional tax prep team will help you avoid common mistakes when filing your taxes. If you go it alone, you should understand which common mistakes you should keep an eye out for.

The IRS triggers most audits through a computer program that looks for basic errors and anything else that might throw up a flag. Generally, if your tax return stands out in a particular way compared to most other tax returns like yours, the IRS might audit you.

And it’s good to have support on your side for the process. If you work with a tax prep service, make sure to ask them if they’ll work with you in the case of an audit. If not, spend the extra time looking for someone who will.

Filing taxes in 2021: Are you ready for the challenge?

You shouldn’t spend all of tax season scratching your head and wondering if you’ve screwed something up. You should walk into filing taxes in 2021 with the confidence of someone who knows they’re getting the best tax savings available to them.

After such a challenging 2020, we hope that you can find some relief this year—and we’re here to help. While we hope you’ll take the opportunity to partner with an expert tax team who can manage your tax return from start to finish and guide you to even more savings, we know you have the tools to go it alone with confidence, too.

Now that you have a better sense of how income, tax credits, and stimulus payments will factor into your tax return, it’s time to file. Take the information you have and don’t delay yourself into last-minute filing. Get started now and get that tax refund processing.

Have questions about filing taxes in 2021? We are always here to help. Give us a call at 1-800-410-8605 or send us a message today and let’s get your tax return filing process started on the right foot.


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