Tax Day can be one of the most dreaded days of the year, especially when you’re completely lost on what you should be doing. This year’s tax season was extended for individuals to May 17, and though that extra month may have seemed like some welcome padding to get everything in order, this year comes with a host of changes mostly as a result of the COVID-19 pandemic, from a tax break on unemployment to people filing to claim their missing stimulus checks.
As we get closer to Tax Day, the first step to take is to decide how you want to file your taxes. There are many options when it comes to filing your taxes, and each option has its pros and cons. For example, if you choose to file your taxes on your own, you’re more likely to save time and money. Plus, you may feel more empowered at the end of the process. On the other hand, if you choose to file through an in-person tax provider or CPA, you may pay more money to file your taxes, but get peace of mind that your taxes were filed properly.
Ultimately, you know your situation best. Consider which option makes the most sense for you and go from there. Financial resource and champion for financial progress, Credit Karma, is here to cut through the noise and break down everything you may be hearing, starting with your taxes. Below, Colleen McCreary, Chief People Officer, and financial advocate of Credit Karma shares a few tips to help set you up for success.
Don’t procrastinate. Get organized. The best time to get organized is now, given how close we are to Tax Day.
Take the time to gather all tax-related documents before you sit down to file your taxes. It may sound obvious, but you’d be surprised how much time you can save if you have all of the necessary paperwork in front of you when you go to file.
Know what you owe so you can make a plan to pay your bill if you have one, or allocate the money if you expect a refund.
Online tools like Credit Karma’s 2020 Federal Income Tax Calculator give American a glimpse into tax returns or payments estimates without going through the full filing process. This will give you a sense of how much you might owe and allow you to make a plan.
Think you’re due a refund? File now.
If you expect to get a refund, file quickly so that money is in your pocket. For many Americans, their tax refund is their biggest paycheck of the year. If that’s the case for you, set aside as much of it as you can. This will help bolster your savings quickly and provide peace of mind knowing you have money when you need it. The IRS typically sends refunds within 21 days of filing. That also means you can get a jumpstart on paying down debt or building your savings. Make a plan for yourself and your family to file as soon as possible.
Check-in on your CPA availability.
If you plan to file your taxes with a paid expert, keep in mind services could be impacted by workplace disruptions or social distancing. Reach out to them now to confirm you can work together this season and when you’d need to get them your paperwork. As an alternative, consider a free online DIY option to file in the comfort of your own home.
Remember that you have to report your stimulus payment.
Last year, Credit Karma asked consumers in a survey if they thought they had to report their stimulus payment on their 2020 tax return and found 50% of Americans believed they did not have to report their payment. The reality is, since the payment is actually a tax credit, you’ll need to account for it on your tax return. But don’t worry — the credit won’t reduce any tax refund you’re owed.
And, remember that unemployment money is taxable.
Last year, a Credit Karma survey found that 27% of Americans incorrectly thought their unemployment benefits were tax-free, which is concerning. The reality is, unemployment benefits are generally subject to federal income taxes — and possibly state tax if you live in a state that taxes individual income.
If you need to request an extension beyond Tax Day, request an extension.
Form 4868 will allow you until October 15 to file your tax return, however you will still be required to pay your estimated tax liability by the May 17 deadline. If you’ve overpaid or underpaid on your estimate, any overages or underpayments will be sorted by your adjusted return deadline.
If you can’t pay all at once, request a Payment Plan.
Filers can create a payment plan agreement with the IRS to pay owed taxes within an extended timeframe. The minimum monthly payment depends on how much you owe. To get the process started, filers can apply online through the IRS Online Payment Agreement tool.
Most importantly, make a plan for your refund.
For many Americans, their tax refund is their biggest paycheck of the year. That can be a big deal for your finances this year. If you expect to get a refund this year, it’s important to have a plan in place before you get the refund for how you’re going to use that money. Once you know how much your refund will be, make a plan for how to best utilize that money so you don’t spend it on something you don’t need. If you can, consider putting your refund toward paying down debt or building savings.
One important thing to note is, the IRS most often recommends e-filing as the best way to file, whether you do it yourself or have someone else do your taxes. For starters, e-filing is faster and safer than a paper return. This is especially true now with COVID-related mailing delays and longer processing times for mailed returns.