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4 Tips to Avoid Pitfalls During the 2020 Tax Season

by
Bryce Welker
on
6/10/2020
4 Tips to Avoid Pitfalls During the 2020 Tax Season

Saying that this year has been unusual would be a massive understatement. With the entire world being blindsided by the COVID-19 pandemic, just about everyone has experienced substantial changes to their ordinary way of life. And with so many pressing issues taking the forefront during these challenging times, others have fallen to the wayside.

However, there is one silver lining to this extremely unfortunate situation: many individuals and organizations are taking action to provide relief for common folks in the midst of this crisis. For the United States government, this includes freezing evictions for renters, purchasing and distributing food from farmers, and pushing back the deadline for filing federal taxes.

Regarding this last point, taxes are likely not very high on your current list of things to worry about— which is completely understandable. That being said, there are some important steps you can take right now to prevent yourself from experiencing difficulties once you're ready to file your 2019 tax return this year.

So take a look at these four tips to prevent you from encountering any financial pitfalls as you prepare to file in July!

Tip #1: Extension to File vs. Extension to Pay

Here's the most important thing to understand in order to avoid getting screwed on tax day: an extension to file is NOT the same thing as an extension to pay. When it comes to your federal tax returns, the IRS has extended filing and payment deadlines to July 15; however, your state tax return may be a different story.

Check your state's department of revenue to see if they've made any changes to their tax filing/payment deadlines. The AICPA has an excellent resource here that you can consult for reference, but there's a version here that's much easier to read. For the most part, states have pushed their deadlines to match federal ones, but there are a few that have a different approach.

Also, many wage-earning workers don't need to worry about changes in payment deadlines. If you filled out a W4 for your job and a W2 on tax day, your income tax is already withheld from each paycheck. However, you're going to want to be extremely mindful of all tax changes from a state and federal level if you're self-employed or run a small business. 

More on that below:

Tip #2: Two Payments, One Deadline

For those of us who don't have their income taxes withheld — self-employed, small business owners, etc. — the best method of avoiding an unwieldy tax bill next year is to make estimated quarterly payments. This practice is extremely important in the eyes of the IRS; consequently, you can expect to pay additional fees and interest if you don't make these payments in time.

Typically, your first quarterly payment is due on tax day: April 15. From there, subsequent payments are expected in June, September, and January of the next year. However, now that tax day has been rescheduled in most parts of the country to July, the deadlines for these first two payments are subject to similar changes.

Again, this change will vary based on the part of the country where you're filing your tax return:

  • A few states like Arkansas haven't changed the deadlines for any estimated tax payments.
  • Other states have rescheduled the first payment but not the second one, as is the case in Delaware.
  • However, there are also states that have pushed both April and June's payment deadlines to the same day, such as Colorado and California.

The last scenario is certainly the most forgiving, but it can also be disastrous to your finances if it catches you off guard. To avoid having to pay way more than you can afford, consider making your estimated payments a month or two earlier if this situation applies to you.

Tip #3: Get the Most From Your Stimulus Check

Aside from deadline extensions, bailouts, and emergency loans, the United States government is currently still in the process of distributing stimulus checks to qualified citizens as a result of the CARES Act. Unfortunately, there's been a lot of confusion around who these checks are being sent to, whose name is going to be on them, and where the money's coming from. To help resolve the confusion around that last point, here are some corrections to common misconceptions.

  • No, your stimulus check is not taxable; you don't need to report it as income on your 2020 tax return. 
  • Nor is the stimulus check a loan, so don't worry about needing to pay it back to the government next year— or ever. 
  • Yes, the stimulus check is an advance on your tax refund for next year, but it isn't taken out of next year's total; you'll still earn the same refund as normal.

How is it possible for you to receive an advance on next year's tax refund in addition to the full amount later? Well, the exact term you'd use to describe the stimulus check is a refundable tax credit. That means it's an extra tax credit that's being applied instantly— instead of when you normally receive your refund. Now that you know that there's no strings attached to your check, you shouldn't have any trepidation about receiving it. 

You can read the requirements and check your status by visiting the IRS Coronavirus Tax Relief webpage, but here's a quick tip to help you get the most money. The amount that's on your check decreases if your annual income is over $75,000, and the IRS will use the information on either your 2018 or 2019 tax return to determine your eligibility. So if you made more than $75,000 in 2019 but less in 2018, hold off on filing your 2019 return until you get that check!

Tip #4: Look for New (and Old) Credits and Deductions

In addition to the stimulus tax credit, there are several tax deductions you can apply to your 2020 tax return. Aside from a few new tax credits related to COVID-19, there are some preexisting deductions that you may suddenly qualify for as a result of recent changes to your environment and routine.

Are you currently practicing social distancing by working from home? If so, you can apply for a Home Office Deduction. Although this only applies to the self-employed, the IRS stipulates that you can also apply for this deduction even if you also conduct business in other locations. You can get the most out of this deduction if you set aside an entire room in your living space as a home office. Furthermore, you may also be able to write off any necessary equipment purchased in order to work from home, such as an extra computer monitor or a fancy printer.

Another deduction you can start working towards is charitable contributions. After all, there are many people who are facing considerable hardship because of the pandemic: the recently unemployed, the homeless, and the immunocompromised. If you can, making a donation to charity now would be more helpful than ever, and you can write it off your taxes next year. Personally, I recommend supporting the Johns Hopkins Center or GiveDirectly. (I have no personal or professional relationship with either of these organizations and receive no compensation for promoting them.)

With so much going on in the world right now and with so many questions unanswered, it's natural to change your current priorities. However, applying some of these tips now can help you avoid problems in the future. With that being said, the best thing you can do right now to protect yourself is to avoid unnecessary travel, limit social interaction, and wash your hands!

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Bryce Welker

Bryce Welker

Bryce Welker is the CEO of online education company Crush Empire, and founder of Crush The CPA Exam.

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