By taking a few simple steps now, you can greatly reduce uncertainty and stress during the upcoming 2020 tax filing season. These four actions will help complete your return efficiently, without unpleasant surprises:
Gather Documents Showing Wage, Business and Other Income
If you work as an employee, you should receive a W-2 from your employer(s) by early February, showing your earnings for the year and the total tax withheld from your paychecks. If you are self-employed (including gig economy work) or own a business, you should receive 1099 forms from your clients showing fees paid to you.
Interest and dividend income, along with royalties from past work, are also reported on 1099 forms. Recipients of unemployment benefits (including $600 federal Pandemic Unemployment Assistance payments) and/or taxable Social Security benefits should receive a year-end statement detailing these payments as well. Store all of these documents with your tax records.
Organize Records of Other Potentially Taxable Transactions
The sale of major assets like stock, a house or any other “big ticket” item may yield a taxable capital gain. Many cryptocurrency transactions (such as buying and selling Bitcoin) also have tax implications, since the IRS classifies cryptocurrencies as property. Make sure you have complete records of all your significant financial and property transactions during 2020.
Be Aware of the Rules for Refund Interest and Stimulus Payments
Because the processing of some tax refunds was delayed in 2020 due to the pandemic, the IRS paid interest to many refund recipients. Unlike refunds themselves, these interest payments are classified as taxable income. If you received a tax refund interest payment, the IRS will send you Form 1099-INT in January, which you will need when preparing your return.
Recipients of a 2020 Economic Income Payment (EIP, also called a stimulus payment) should have also received IRS Notice 1444, Your Economic Impact Payment. Make sure to keep this notice handy. If your EIP amount was lower than it should have been, Notice 1444 will give you the information you need to claim a tax refund for the balance owed to you.
With all the unpredictability of life during a pandemic, staying ahead of the tax game is more important than ever. Assemble your records as soon as possible. If you have any questions, a tax advisor can help you identify and organize the documents you need. Just remember that tax professionals have far greater availability early in the tax season than at the last minute.