COVID-19

Why Filing Your 2020 Taxes Now Could Be a Mistake

Why Filing Your 2020 Taxes Now Could Be a Mistake

It’s here again. Tax season “officially” started on the 12th of February, and this year’s tax filing deadline falls on Thursday, April 15th. But if you’ve been in the habit of getting your tax returns in early — whether to get your hands on your refund early or just because you like to clear it off of your “to-do” list — you may want to hold yourself back this year. That’s because they could have an impact on your eligibility for the potential upcoming stimulus payments.

As you may be aware, Congress and the Biden administration are in the midst of negotiating a third stimulus plan, trying to determine exactly how big it’s going to be and what’s going to be included. For taxpayers, one of the most consequential items being discussed is exactly what the cut-off is going to be to qualify for the $1,400 payments that have been proposed. While income levels of $75,000 for individuals and $150,000 for married couples has been discussed as the threshold, some are proposing lower levels like $50,000 for individuals and $100,000 for married couples.

At this point, everything is uncertain – though there is hope that a decision will be made by mid-March. No matter where the final number lands, one thing that’s clear is that the stimulus check you receive (or don’t receive) is going to be based on the adjusted gross income reflected on the most recent tax return that the IRS has on record for you. That means that if your adjusted gross income is anywhere in the neighborhood of possibly qualifying for a stimulus check, you need to take a look at your 2019 income and 2020 income and decide which one puts you in the best position.

Tax year 2020 was a tough income year for a lot of people. Businesses closed and revenues fell, so if 2020 saw your income drop then getting your tax return on the record as soon as possible makes a lot of sense. But if your adjusted gross income went up in 2020, waiting a bit to file your taxes may be the smartest thing for you to do.

The best way for you to gauge whether to file your tax return now or to wait to submit it is fairly simple – go ahead and prepare your taxes, then compare your adjusted gross income from 2019 to 2020. Even if you normally get your return in early because you rely on your tax refund or the earned income credit to cover your bills, waiting may make sense if you earned more in 2020 and as a result risk receiving less from the stimulus by letting the IRS know before they cut the checks.

If your income fell dramatically in 2020— or worse, if you got laid off — then there’s no doubt that you should file ASAP. To you, it may seem remarkable that there are people for whom it’s even a question. But the truth is that as much as the pandemic has impacted all of our lives, the worst effects of the economic devastation has been limited to specific industries like food service and travel-related businesses, and the workers who earn the lowest incomes are the ones that have been hardest hit economically.  The people who were always making higher salaries in white collar jobs have either been unaffected or have even found themselves doing a bit better for not having to commute.

Experts who are aware of the dilemma that this has placed taxpayers in have decried the confusion that has been created and have asserted that a simple statement should be made as to which year will be used as a basis for qualifying for the payment.

While waiting to file your tax return may make life more challenging for tax preparers, who prefer to get things in as soon as possible, what’s most important is that low-income individuals who have already been harmed by the pandemic do everything that they can to maximize their financial situation. If you think that you’re in a position where creative calculations of your 2020 tax return might qualify you for stimulus money, reach out to your tax professional and ask them for help.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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