Matter of Tax
Common Errors in Tax Filings and the 3rd Round of Economic Impact Payments
With a federal tax code that is over 2,500 pages, no wonder tax strategies can be overwhelming.
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
— Benjamin Franklin
May 17th is Right Around the Corner
You probably know that the Treasury Department and Internal Revenue Service announced that the federal income tax filing due date for individuals for the 2020 tax year was extended this year. More specifically, individual taxpayers could postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.
This postponement applies to individual taxpayers as well as those who pay self–employment tax. If you needed until May 17th, you did not need to file any forms or call the IRS to qualify, but if you need additional time beyond the May 17th deadline, you need to request a filing extension until October 15th by filing Form 4868.
Common Errors When Filing Taxes
Given that May 17th is fast approaching, the IRS posted a list of common taxpayer errors that could hamper the processing of your taxes, including delaying any refunds that you might be due. Here are a few excerpts directly from the IRS:
Report all taxable income. Be sure to have income documents on hand before starting the tax return. Examples are Forms W–2, 1099–MISC or 1099–NEC. Underreporting income may lead to penalties and interest.
Get names and Social Security numbers right. Enter each Social Security number (SSN) and individual’s name on a tax return exactly as printed on the Social Security card. Persons generally must list on their individual income tax return the SSN of any person they claim as a dependent. If a dependent or spouse does not have and is not eligible to get a SSN, list the Individual Tax Identification Number (TIN) instead of a SSN.
Correctly answer the virtual currency question. The 2020 Form 1040 asks whether at any time during 2020, a person received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency. If a taxpayer’s only transactions involving virtual currency during 2020 were purchases of virtual currency, they are not required to answer “yes” to the question.
Mail paper returns to the right address. Paper filers should check the right address for where to file on IRS.gov or on form instructions to avoid processing delays. Note that due to staffing issues related to COVID–19, processing paper tax returns could take much longer than usual. Taxpayers and tax professionals are encouraged to file electronically if possible.
Use the right routing and account numbers. Requesting direct deposit of a federal refund into one, two or even three accounts is convenient and allows the taxpayer access to his or her money faster. Make sure the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account. Taxpayers can also use their refund to purchase U.S. Savings Bonds.
Sign and date the return. If filing a joint return, both spouses must sign and date the return. E–filers can sign using a self–selected personal identification number (PIN).
Keep a copy. When ready to file, taxpayers should make a copy of their signed return and all schedules for their records.
Request an extension, if needed. Taxpayers who cannot meet the May 17 deadline can easily request an automatic filing extension to October 15 and prevent late filing penalties. Use Free File or Form 4868. But keep in mind that while an extension grants additional time to file, tax payments are still due May 17.
Did You Receive a 3rd Economic Impact Payment?
The Third Round of Economic Impact Payment was authorized by the American Rescue Plan Act of 2021 as an advance payment of the tax year 2021 Recovery Rebate Credit and the IRS started issuing payments to eligible individuals back in mid–March. And while no action is needed in order to get a third payment, the income limitations have changed, so some individuals who received a first or second Economic Impact Payment might not receive the third.
According to the IRS, generally someone is eligible for the full amount of the third Economic Impact Payment if they:
- are a U.S. citizen or U.S. resident alien (and their spouse if filing a joint return), and
- are not a dependent of another taxpayer and
- their adjusted gross income (AGI) is not more than:
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower
- $112,500 if filing as head of household or
- $75,000 for eligible individuals using any other filing status
The Amount of the Third Economic Impact Payment?
The third Economic Impact Payment amount is:
- $1,400 for an eligible individual with a valid Social Security number($2,800 for married couples filing a joint return if both spouses have a valid Social Security number or if one spouse has a valid Social Security number and one spouse was an active member of the U.S. Armed Forces at any time during the taxable year)
- $1,400 for each qualifying dependent with a valid Social Security number or Adoption Taxpayer Identification Number issued by the IRS
The fact is that the CARES Act was by far the largest economic bill in America’s history and the 2nd and 3rd COVID relief details are part of bills that were thousands and thousands of pages long. Further, with a federal tax code that is over 2,500 pages, no wonder tax strategies can be overwhelming.
So, before you go down a path that might not be in your best interest long–term, make sure you consult with your financial advisor to determine how the new tax changes and new tax bills might impact you and your family.
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