Jonathan Gassman recently visited his 94-year-old mother in Florida. One of the primary purposes of his visit? To help her with her taxes. "I'm Mister Checklist," says Gassman, who runs Gassman Financial Group, and is a proponent of a simple, straightforward tax to-do checklist for all. "Let's make sure we don't leave anything off," he adds.
As it was for millions of us, 2020 was a very different year, tax-wise. For example, Mama Gassman had "easily more than $100,000" in medical expenses this year, according to Jonathan. For the first time in years, she'll be itemizing deductions—rather than taking the IRS standard figure.
A tax checklist is great advice for anyone in the wake of 2020. Here are some things to consider as you build—and check off—your own, although always review your circumstances with your financial advisor if you have one.
What to ask a tax preparer
Amber Gray-Fenner, owner of Tax Therapy, urges taxpayers to ask about a tax preparer's qualifications and practice. That includes inquiring about how much continuing education they've had on COVID-related tax changes, their overall level of experience, their staffing, and the volume of work the office does.
"I do not feel like we could do more than, and this is a maximum, 350 tax returns in a season thoroughly," Gray-Fenner says. "If you have one of these pop-up shots with one preparer and they're preparing 500 returns a year, you have to wonder how they're getting it done." Also ask about a tax preparer's written information security plan, or WISP, to see how safe your information is. "If they go deer-in-headlights, ask if they have professional liability insurance," Gray-Fenner adds.
Where (and when) to start
Pull together all your documents: last year's tax filing, W-2 forms; 1099 forms if you're self- employed or have certain other types of income like investment or unemployment; medical expenses; charitable donations; college tuition tax forms; and so on. Some may come in electronic form and not paper.
Start preparation as early as possible. The closer you get to April 15, the greater the chance that you'll have to file an extension and wait longer than you would have for a refund; preparers get busy this time of year.
Set up an online account with the IRS. You can check what you've filed and paid—and make electronic payments (much better than sending in checks).
If your family has seen an upward financial transition within the last generation, advice on strategies is a must. "The majority of folks we're talking to are the first generation of wealth builders," said Calvin Williams of Freeman Capital, which caters to underserved communities. "They are facing problems that their parents never faced."
In addition, year-over-year changes in your financial picture are always important. Life changes like a new kid (whether a baby, adoption, or foster child) the need to care for an older parent, a marriage, divorce, or death of a spouse—all of those have significant implications for taxes, according to Mark Steber of tax preparation service Jackson Hewitt. Likewise, a new job, an unexpected windfall from an investment, a major medical expense, or the purchase or sale of a house should all be factored in.
Specific 2020 issues
Last year was particularly disruptive, of course. As Steber says, 2020 was truly "a year of unprecedented change—and most folks who will file tax returns will see that [the upheaval of] 2020 is reflected in their tax returns."
One example is unemployment insurance. It is a taxable item on the federal level—and in most states as well. If you received payments and didn't either put money aside or choose to have taxes withheld, you may have a bigger tax bill than expected.
But help may be on the way. "Part of what Congress has on the table and has not yet passed is that the first $10,200 [in unemployment payments] would be tax exempt," says Taxaroo's Knox Wimberly. "If that happens, this could be a significant impact." For some, that could mean a $2,000 to $3,000 difference, according to Wimberly.
That said, the measure may or may not pass. So if you received unemployment but can wait on a refund, consider holding off on filing until Congress makes a decision. Otherwise, you'd need to later file an amended return, which could add significant processing delays. Also, ask your preparer if your employer used the optional payroll tax deferral, advises Gray-Fenner. That could mean even more money due to you.
As for those stimulus payments? Those were actually refundable tax credits, meaning that they applied directly against what you would owe in taxes and were refundable. So, if you paid enough in taxes, you got the money. And although some individuals or couples were not eligible for full (or any) stimulus payments based on their 2019 income, a 2020 income loss might mean they now qualify and could claim the balance on their taxes. Better late than never?
Overlooked ways to max your tax payoff
There are plenty of ways to get the most out of your taxes—that plenty of us forget about. For example, an income reduction could mean unexpected access to the Earned Income Tax Credit or child tax credit for dependent children.
And "if your taxable income falls below the long-term taxable gain rate, you're [also] at a zero-percent capital gains rate," Stephanie McCullough, founder of Sophia financial planning for women, says. "I have clients," she adds, whose "grandfathers bought them stock for their bar mitzvah or something"—some of whom may now be able to sell shares without taxes due. And don't forget the special $300 charitable contribution deduction that Congress added. That's available even if you don't get to itemize.
If you took money out of a 401(k) to help pay expenses, that cash is taxable, too. However, if you didn't already pay the taxes, you may be able to over a three-year period—and not stress yourself unnecessarily now.
Are you or your parents retired? Tally medical expenses, like Gassman did for his mother, and include, if applicable, Medicare premiums taken out by the government to see if that provides a new deduction or tax break.
States and many municipalities also have taxes. That can become double taxation for many who may have worked at an office in one state or city in 2020 and then went home to quarantine in another, or perhaps even moved. "A lot of employers are double withholding, in the state you work and in the state you live," to avoid withholding too little, explains Gray-Fenner. In addition, most states tax unemployment income, although, according to Robbin Caruso, partner at accounting firm Prager Metis, "a number of states, including Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia do not."
Mind your business
Millions of people officially filed to start businesses last year—the largest number ever. Others may have done gig work through an online platform to help make up a shortfall without thinking of themselves as starting a business. If any of that applies to you, then congratulations: You're now an owner.
"A lot of people turned their side hustle into their main hustle when they lost their corporate jobs," Ben Richmond, CPA, of Xero says. Of course, owning a business includes the additional tax considerations that your more experienced sister entrepreneurs have. There are more forms and taxes on that income—including Social Security. But there are also deductions waiting for you.
"I find the self-employed individuals are not educated well enough to understand all of the possible deductions they can avail themselves of," Gassman says. "Like home office." McCullough agrees: "Think about what legitimate business expenses you had in setting things up ahead of time, like getting a domain registered or buying a laptop."
In your first year of business, you're "able to claim up to $5,000 in start-up costs," Richmond notes. Even car use for business is deductible, whether you're using the standard mileage rate the IRS publishes annually or by closely tracking actual costs. Gig workers might get that deduction and the home office deduction.
Employees working from home can't deduct the use of their office space, but those with a new business probably can, even if that business is only part-time—as long as the space is devoted to that use.
Sure, this may sound like a whole lot of steps, but taken individually, they're all manageable. Plus, they're more than worth it for the payoff: Reducing your tax liability or increasing your refund. Just start by crossing one item off your list at a time—you've got this.