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Preparing for Tax Time

Preparing for Tax Time

Wednesday, March 17, 2021/Categories: Bank News, Saving & Planning

Tax season is here and after last year’s implementation of two stimulus packages and another on the horizon, your tax return may look different this year. And if you expect your taxes to be more complicated than usual due to unemployment benefits, other kinds of government aid, or picking up another job, it’s more critical than ever to prepare your finances so that you can file as soon as possible.

Luckily, there are plenty of resources that provide valuable information that can help you figure out exactly what you owe. Here are six tips to help you as you prepare to file your taxes this year. Please bear in mind that Andover doesn’t provide legal or tax advice. Consult your legal and/or tax advisor.

1.    Make Sure Your Financial Records are Well-Organized
Taking the time to organize your tax documents and finances early in the season can make the process of actually filing your taxes easier and more streamlined. You can use your return (of which you can get a free copy through the IRS online portal or by logging in to any online tax service you might’ve used last year) from the previous year to give you a starting to point when assessing things like your previous income and deductions. If you were working with any kind of professional tax expert to help you with the process, you likely received a copy of your return when you filed. Using last years return gives you a good model of what documents you will require to file this year.  

2.    File as Soon as You Can
This year, filing early means filing right now. The IRS began accepting tax returns February 12, 2021, and while you still have plenty of time before April, filing sooner is never a bad idea. Filing early can mean that your tax return will be more accurate, potentially meaning more money in your pocket when the refunds roll out. Filing early also can give you more time to pay a tax bill and less time spent being a potential victim for tax-related identity theft.

3.    Look for Forms and Benefits Particular to Your Situation
There are certain tax credits and deductions that may be applicable to you if you are yourself or a parent of a student. The American Opportunity Tax Credit (AOTC) allows an annual credit of $2,500 per eligible student for qualified expenses attached to pursuing an education. If your tax liability is low and you don’t have any money owed to the IRS, you can get up to 40% of the credit refunded to you in cash, potentially putting an extra $1,000 dollars in your bank account.

In order to qualify, you or your dependent must currently be pursuing a degree or be enrolled at least half-time. This credit is only applicable for four years, so if you or your dependent’s schooling takes longer than that, you will no longer be eligible.

4.    Beware of Changes to Your 2020 Return
There are big changes coming in the 2021 tax season if you have been a recipient of either stimulus check or have been receiving unemployment benefits through the course of the pandemic.

If you did not receive your stimulus payment, you can claim them on your 2020 tax return through the Recovery Rebate Credit, which will either increase your refund or reduce the amount you owe. This credit can be applied to both rounds of stimulus.

If you are one of the tens of millions of Americans who received unemployment income in 2020, keep on the look-out for your Form 1099-G, “Certain Government Payments.” Unemployment income is considered taxable income by the IRS, so you are required to report it.

5.    Find Good Tax Servicing Websites or a CPA
At the end of the day, filing taxes can be a difficult and confusing process, but there are plenty of resources out there to help you get familiar with your tax return. Online resources like TurboTax can help you make sense of your finances and come up with a plan. Building a working relationship with a Certified Public Accountant (CPA) can help you or your business with more specific needs to come up with a solid tax plan for the future, and even may guide you towards deductions.  

6.    Use Your Refund Wisely
If you receive a refund this year, put that “extra” money to work instead of spending it. Utilize any number of savings options available for a future goal or even just a rainy day. Although it might be tough, pretend like you never had it to begin with. Your future self will thank you.