How to Prepare for 2021 Tax Season

2021 has come and gone, so the Internal Revenue Service (IRS) is strongly advising taxpayers to equip themselves with the right information to avoid any inconveniences or worse, penalties. If you are not sure what steps to take to make the tax filing stress-free, keep on reading! 

What Should I Consider When Filing in 2021?

There's a lot of data that could go missing. Examine this list and ensure that you take into account all of the points.

Recovery Rebate Credit/Economic Impact Payment

If you got a Recovery Rebate Credit, you should have received a Notice 1444 from the Internal Revenue Service. Make a copy and save it with your tax records for 2021. If you believe the payment amount was incorrect, you may require it.

 On their 2021 Form 1040 or Form 1040-SR, taxpayers may be eligible for a Recovery Rebate Credit, often known as an Economic Impact Payment. If they haven't received an Economic Impact Payment yet, or if they haven't received the full amount of the Economic Impact Payment (the maximum credit is $1,200 for single filers, $2,400 for married couples filing jointly, plus $500 for each qualified kid), this is a possibility.

The Economic Impact Payment is not subject to taxation. If you did not get the amount for which you were eligible, you will instead be eligible for the Recovery Rebate Credit when you file your 2021 tax return.

$300 Charitable Deduction

Most taxpayers will benefit from a special tax credit approved by Congress for the 2020 tax year as part of the pandemic relief program, which will be extended until 2021.

Individual taxpayers would be able to deduct up to $300 in monetary gifts made this year when filing their federal tax returns in 2022. According to the Internal Revenue Service, married couples who file joint tax returns can now deduct up to $600 instead of the $300 they were allowed previous year.

Refunds

The Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your refund. If you claim this credit, your refund may be delayed. By law, the IRS has to wait until February 15 to issue refunds to taxpayers who claim the Earned Income Tax Credit or Additional Child Tax Credit. This includes your entire refund, not just the part that’s related to the credit you claimed on your tax return.

Virtual Currencies

It's important to remember that Form 1040, Form 1040-SR, and Form 1040-NR contain a question about virtual currencies such as Bitcoin and Ethereum.

The question asks, "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

Everyone filing the above-mentioned forms must check one box answering either "Yes" or "No" to the question. This question must be answered by all filers, not just taxpayers who engaged in a transaction involving virtual currency in 2021.

When to check "No":

Filers who merely owned virtual currency at any time in 2021 can check the "No" box when they have not engaged in any transactions involving virtual currency during the year, or their activities were limited to:

• Holding virtual currency in their own wallet or account.

• Transferring virtual currency between their own wallets or accounts.

• Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo.

• Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.

When to check "Yes":

A filer must answer "Yes" to the virtual currency question if they engaged in the following transactions:

• The receipt of virtual currency as payment for goods or services provided;

• The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;

• The receipt of new virtual currency as a result of mining and staking activities;

• The receipt of virtual currency as a result of a hard fork;

• An exchange of virtual currency for property, goods, or services;

• An exchange/trade of virtual currency for another virtual currency;

• A sale of virtual currency; and

• Any other disposition of financial interest in virtual currency.

Additionally, if a filer disposed of any virtual currency that was held as a capital asset through a sale, exchange, or transfer, they must check "Yes" and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).

Finally, if a filer received any virtual currency as compensation for services or disposed of any virtual currency that they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040, 1040-SR, or 1040-NR, line 1, or inventory or services from Schedule C on Schedule 1).

Tax Due Dates

Most importantly, stay on top of impending tax deadlines.

The First Step is the Most Important One

The first step for taxpayers who are getting ready to submit their taxes is to gather their records. Before completing a 2021 tax return, taxpayers should gather all year-end income documentation to avoid processing delays that could hinder their refund.  Before beginning to prepare their return, it is critical that individuals have all of the appropriate paperwork. This aids in the preparation of a thorough and accurate tax return. Here are some things taxpayers need to have before they begin doing their taxes:

In January, businesses and financial institutions normally send out forms or make them available online. They should be thoroughly examined by taxpayers. If any of the information on the forms is incorrect, the taxpayer should contact the payer as soon as possible to get it corrected.