With so many tax changes that happened last year due to the ongoing pandemic, it can be difficult to keep up with all the updates in tax filing laws. Optima Tax Relief looks into tax updates taxpayers should know about and how to prepare to file their 2020 federal tax returns.
Choose Direct Deposit
It is recommended that taxpayers choose direct deposit when filing their taxes because it is the safest, most accurate and fastest way to receive their refund. Choosing to go with direct deposit means that individuals will have any tax refund electronically deposited for free into their financial account.
Eight out of ten taxpayers receive their refund through direct deposit because it is simple and secure. This is also the same electronic transfer system that is used to deposit almost 98% of all Social Security and Veterans Affairs benefits into millions of accounts.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) allows qualifying workers with lower to moderate income additional financial assistance. EITC reduces the amount of tax someone owes and could possibly give them a tax refund instead even if they don’t owe any taxes or aren’t required to file a tax return.
Individuals will need to first file a federal return as well as meet certain requirements in order to receive this credit. Taxpayers can utilize the EITC assistant on the IRS website to determine if the qualify.
Taxable Unemployment Compensation
Due to COVID, millions of Americans received unemployment compensation in 2020 for the first time. Taxpayers need to be aware that this compensation is taxable and needs to be included in their gross income on their tax return.
Individuals have the option to elect to have their federal taxes withheld from their unemployment benefits or make estimated tax payments. For those who don’t pay taxes on their unemployment throughout the year, they can expect to pay up after filing their 2020 tax return.
Interest is Considered Taxable Income
Taxpayers who received a refund on their 2019 tax returns may have also received interest from the IRS. The interest payments were a result of the postponed filing deadline of July 15 due to the COVID-19 pandemic.
The 2019 refund interest payments are taxable and taxpayers must report this interest when they file their 2020 federal income tax return. The IRS should send a Form 1099-INT to anyone who received interest totaling at least $10.