If you are furiously digging through your office drawers looking for receipts and those pesky 1099-G forms for this week’s tax deadline, we encourage you to keep doing so. OK, truth is that your 2020 federal 1040 returns are due May 17 because the IRS “wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic.” However, that doesn’t mean you get to slack off, as the extension is only for 1040 and 1040-SR returns. If you pay quarterly taxes, or file trust, corporation, partnerships, gift tax returns, or file a FINCEN (Formerly FBAR) with your 1040, those are all still due April 15, 2021.
Meanwhile, those who have computed and filed their federal returns may have been surprised to find out that they owe. It is important to understand that the “stimulus payments,” “recovery rebates,” or Economic Impact Payments were all advances of tax credits. The initial $1,200, which began distribution in March 2020, and the second payment of $600, which began distribution in December 2020, were both advance credits on your 2020 income tax. The most recent stimulus payment of $1,400 is an advance on your 2021 taxes. These payments will not add to your taxable income for the year. The laws that created these payments did not contain a “clawback” mechanism that would allow the government to recoup the funds.
If you were surprised by a tax bill this year, it may be because of other coronavirus-related issues, such as coronavirus-related distributions or unemployment benefits. Most recently, the March 11 American Rescue Plan includes a provision that lets taxpayers waive federal taxes on up to $10,200 of 2020 unemployment benefits per person. If you filed and paid federal tax on these benefits, the IRS recommends that you do not amend your return—they will figure it out on their end and issue a refund. Also note that Georgia is one of 13 states that require taxpayers to pay state taxes on the entire amount of their unemployment compensation.
While we all want to pay less tax, the reality is that no one is going to their employer to ask for a pay decrease because they don’t want to pay income tax. What you can do is work with your tax adviser to ensure that you are paying your tax liability evenly throughout the year, rather than all at once the following April. You can take advantage of tax-deferred retirement accounts, such as your employer’s 401(k) or an IRA, to shield a portion of your income from current taxes. However, the day will come when the IRS requires you to withdraw from these accounts and pay tax on the distributions. Health Savings Accounts and Flexible Spending Accounts also allow you to set aside pre-tax money for medical expenses. When used to pay qualified expenses, these disbursements are not taxed. You may also want to explore any tax credits you may be eligible for, including Earned Income Tax Credit, Child and Dependent Care Credits and the American Opportunity Tax Credit.
While you may consider investing in municipal bonds, which are generally exempt from federal taxes, or growth stocks that do not pay dividends, you should not hinder your portfolio growth just to avoid taxes. Investing is meant to grow your money—and with more money comes more problems—or in this case more taxes. With current rates, municipal bonds may not keep pace with inflation, and limiting your stock portfolio could mean you are under-diversified and may increase your risk should the market sentiment change and not favor growth stocks.
If you have questions on how to optimize your income and the taxes you’ll owe, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
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