Tax season can be confusing any year but in 2021? It seems like a comedy sketch. For the majority of us, our work life has changed drastically—many of us are working from home, working multiple businesses, independent contracting, making do with less work, or using social programs. Long gone are the days when a person worked one job from graduation until retirement and got a single tax sheet each year that they dropped off at the accountant’s.
The nature of work is shifting, so is the nature of taxes. The following will break down some of the tax tips that experts have regarding this new season of human employment. Of course, every person and their financial situation is slightly different. For the best results, speak to a professional accountant about the things you could be doing this tax season to save you time and or money.
Get All Your Information Together Early
Before you can break down the tax breaks and write-offs you're entitled to, you want to gather up all your information. This seems like an obvious step that shouldn't need saying, but sadly it isn't. More than likely, your work was wonky in 2020, and this means it might take a bit longer than usual for you to get together all the data you need to understand your income, let alone your expenses.
If You Withdrew Money From Your Retirement Account Early In 2020
Because the year has been so odd, special treatment regarding retirement account withdrawals is happening. Typically, the IRS will charge a 10% penalty if you take money out of your 401(k) or individual retirement account before the age of 59 and a half. The CARES Act is waving this penalty for this tax season if you, your spouse, or your dependent was diagnosed with COVID-19 or if you experienced financial consequences due to the virus.
You Can Get A Tax Deduction If Friends Or Family Owe Your Money
This isn't a new deduction, but it's one that many people don't know about. It also is maybe more prevalent than ever before. If you've loaned money to friends or family and don't expect the money to be repaid, you can deduct the bad loan amount from your taxes. This is referred to as a non-business bad debt. It can be claimed up to seven years after the date that the loan became worthless to you. If the person you loaned money to is unemployed, experiencing foreclosure, or suffering from other financial struggles, the loan can be considered worthless. You'll also need to prove you took steps to secure the debt, like made phone calls or communicated somehow.
Run Your Information Through A Tax Deduction Searcher
Yes, these exist, and they can end up saving you a lot of money. Using the expense tracker from Keeper Tax, people can manually enter their information or run their bank statements through these programs and receive tax-deduction suggestions. There are a shocking number of tax deductions like money spent on lifetime learning (up to $2000 per year, taking 20% off the first $10,000 you spend for education after high school in an attempt to increase your education).
Freelancers That Work From Home Get Deductions
Those of us who are self-employed can claim tax deductions for the cost of running and maintaining our home office. You can claim part of your home, like a spare room that you use exclusively for work, among other things. When calculating these deductions, there are two possible methods, and each will result in a different amount deducted. You'll have to do both calculations and see which suits your needs best. The standard method calculates a percentage of your total allowable expenses, including mortgage interest, property taxes, insurance, utilities, etc. You divide your home office square footage by your home's overall square footage and deduct that percentage of the above costs. The simplified method involves multiplying a rate (for 2020, the rate is $5) by your home office's square footage to figure your deduction.
Anything That Was Used To Benefit Your Business Can be Written Off
If you can document the reasons for it, you can typically deduct anything used to benefit your business off of your business income. For example, a farmer can deduct the cost of cat food that was used to encourage barn cats to stick around and scare away mice.
The list of dos and don't could go on indefinitely, but hopefully, this information has given you the encouragement you need to start researching the tax breaks you're entitled to. There is far more money to be saved than you might imagine once you start looking.