Why you should start your taxes sooner rather than later


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While deferring your taxes is never a good idea, this year it is especially advisable to get a head start as your tax situation may be more complex than usual. Perhaps because you lost or changed your job, you moved into a new income bracket, you may have become a contract worker for the first time when you took on a part-time job, or you may have accumulated unemployment income on which you now owe taxes. Even if your employment situation hasn’t changed, new tax rules will apply this year that are set out in the CARES Act, Families First Coronavirus Response Act, and Consolidated Appropriates Act that may affect your filing.

Find out: What are the tax brackets and tax rates for 2020-2021?

“Believe it or not, there are more words to the IRS tax code than the Bible,” said Pam Krueger, founder and CEO of Wealthramp. “Taxes are always frustrating, but this year it will be a challenge.”

Be Prepared: Annual Tax Dates You Need To Know

Here are some reasons why filing taxes can be especially tricky for you this year.

You have received a stimulus payment

“You must report any stimulus payments that you received in 2020,” said Tim Yoder, tax and accounting analyst at FitSmallBusiness.com. “If you received the wrong amount, all necessary adjustments will be made to your 2020 tax return.”

Continue reading: Are you eligible for a third stimulus check – and if so, when will you get yours?

However, you do not have to pay taxes on stimulus payments that you have received.

You have received unemployment benefits

“Unemployment benefits are taxable and must be reported on your income tax return,” said Yoder.

Although you may owe taxes on your unemployment income if they are not automatically deducted, if you lose your job, you can qualify for new tax credits and deductions that you did not have in years past.

Did you know: all the new numbers you need to plan taxes ahead

“The loss of income due to unemployment means some households may qualify for Child and Care Credit and Earned Income Tax Credit,” said Michael Benninger, personal finance writer for Finder.

The story goes on

You have made an early distribution from a retirement savings account

“Normally, distributions from your retirement account will be penalized with a 10% penalty if they are made before the age of 59. However, early distributions in 2020 are not subject to the 10% penalty if you or a family member tested positive for COVID-19 or had a financial hardship related to COVID-19, “Yoder said. “By and large, a financial emergency encompasses many things, such as quarantine, layoffs, reduced working hours or inability to work due to inadequate childcare.”

More information: Here is the average IRS tax refund amount

This applies to distributions up to $ 100,000. And although you don’t have to pay the early withdrawal penalty for the 2020 tax year, it should be noted that this does not mean that the distribution itself is tax-free: “The exception only applies to the penalty – all income from the distribution is taxed as usual,” said Yoder.

They became self-employed

If you are one of the many Americans who turned to freelance and other self-employed opportunities during the pandemic, you need to understand the tax implications.

“You have to pay both self-employment tax and income tax on your self-employed income,” said Yoder. “If you have a self-employed income, there is a good chance that you owe federal tax on your tax return. So prepare your tax return early to know what you will have to pay by April 15th.”

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It can be even more complicated if you’ve worked in different states over the course of 2020.

“If you’ve left the big city to work from another state for a few months during the pandemic, you may need to file two separate tax returns for 2020 – one for your home state and one for the state you temporarily resided in. Said Eric Bronnenkant, Tax Manager at Betterment.

Filing early is always a good idea

Even if none of the above applies to you, it’s still a good idea to get a head start on your taxes this year.

Read: How to List Deductions Like a Tax Professional

“This is a complicated year for filing taxes, which makes it even more likely that there will be small issues that will delay your tax filing,” Bronnenkant said. “By filing early, you will have the time cushion you need to correct errors and still receive your tax return on time. Another reason to file your taxes as early as possible is to avoid falling victim to tax fraud. Unfortunately, thousands of taxpayers lose millions of dollars each year to fraudulent tax refunds, and these crimes tend to increase in the times of economic stress we are experiencing. The earlier you file, the lower the risk that someone filed illegally before you. “

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Last updated: February 23, 2021

This article originally appeared on GOBankingRates.com: Why You Should Start Your Taxes Sooner Than Later