The tax code is complicated. It often changes, so it can be difficult to know what rules to follow and what benefits you're entitled to. If you're not careful, a few careless moves could cause you a world of financial worries. Here are a few tax mistakes you should make every effort to avoid this year.
1. Not filing your return early when you're due a refund
Each year, the majority of people who file a tax return are due a refund. If you're expecting money back from the IRS, then it pays to get moving as quickly as you can. This year, the IRS will begin accepting tax returns on Feb. 12. While taxes aren't due until April 15, you could end up getting your money back a lot sooner if you hustle.
It's especially important to file your taxes early this year if you were entitled to one of the recently issued $600 stimulus payments, but didn't receive yours. Those who don't get their stimulus initially will need to claim the Recovery Rebate Credit on their taxes to get that cash. The longer you delay, the longer you'll wait.
2. Not reporting all of your income
Failing to report all your income is a good way to land your return on the IRS audit list. As you set out to do your taxes, remember that you're obligated to tell the IRS about all of the money you earned in 2020, whether it's wages from a side job, interest from your bank account, or dividends in a brokerage account.
Also, don't forget that unemployment benefits are taxable income that you must report as well. Many people lost their jobs in 2020. If you were one of them, you'll need to account for benefits received when you file your upcoming return.
3. Not knowing your tax credits and deductions
The IRS offers filers a host of lucrative tax credits and deductions that can substantially reduce their tax liability. If you're a lower earner, for example, you may be entitled to claim the Earned Income Tax Credit, which is particularly valuable because it's fully refundable (meaning, the IRS will pay you if the credit knocks your tax liability down to below $0). If you have children, it pays to look into the Child Tax Credit. If you're a homeowner, there are several expenses you can deduct, like interest on your mortgage or property taxes, if you itemize on your return.
4. Waiting until the last minute to file your return
Last year, the IRS extended the tax-filing deadline to July 15 in light of the coronavirus pandemic. This year, however, it's unlikely to do the same. The pandemic has been with us since early 2020. Taxpayers should theoretically have plenty of time to complete their returns by mid-April.
Still, this isn't the year to procrastinate. Many filers' financial situations changed in 2020, and the demand for tax prep help may be higher than usual. If you want assistance with your return, line it up well ahead of the deadline.
5. Filing a paper return
The IRS is still in the process of catching up on paper returns that were filed in 2020. Granted, the agency also closed its offices for much of last year and then came back to piles of mail it had to sort through. While we won't necessarily see the same paper backlog in 2021, you're still better off submitting your taxes electronically. Not only will that reduce your chances of making an error, but it will also help expedite your potential refund.
The U.S. economy is in shambles, and there's a pandemic raging. The last thing you need is a tax headache. Avoiding these mistakes will take one potential source of stress off the table.
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10 financial resolutions for 2021 and how to fulfill them
Refinance your loans
While the coronavirus pandemic has wreaked havoc on many parts of life this past year, it has also prompted record low mortgage rates, making this a prime time to refinance and lower your monthly payments. As for student loan refinancing, federal student loans are in forbearance until Jan. 31, meaning interest is suspended and payments are not required. However, this does not apply to private student loans and you may want to consider refinancing these types of loans to lock in lower rates.
Pay down credit card debt
If you have credit card debt, consider making it a goal to pay it off. There are a few approaches you can take, but two common strategies are:
- Paying off your highest debt first (the debt avalanche method)
- Paying off your smallest amount of debt first (the debt snowball method).
If you’re struggling with payments, consider credit counseling, a low-interest balance transfer, a personal loan or even debt settlement.
Automate your savings
One of the easiest ways to build your savings is automating your contributions. Most employers allow you to divide your paycheck into different accounts. If not, you can likely set up automatic transfers with your bank.
Start an emergency fund
In general, experts recommend saving three to six months of living expenses. Start by opening a separate and dedicated high-yield savings account. After that, consider these four tips:
- Evaluate your spending and look for areas where you can save.
- Set a savings goal.
- Set up automatic contributions.
- Increase contributions over time.
Boost retirement savings
Saving for retirement is one of the most important aspects of sound financial planning.
“Use 2021 to boost or maximize contributions to 401(k)s or HSAs, plot out holistic retirement goals and, no matter your age or life stage, take meaningful steps to boost your financial wellness,” says Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America.
If your employer offers a 401(k) match, be sure you’re contributing enough to get the full match since it’s essentially free money. Also look at where your money is being invested. Many experts recommend investing in a diverse portfolio of assets to reduce your risk but still achieve attractive returns.
Don’t limit your investing to retirement contributions. If you already have an emergency savings account, consider setting up another account to invest for goals with specific time horizons, like early retirement or saving for a house.
If you’re just getting started, you may want to look into a robo-adviser, which will do the investing for you after taking your risk tolerance and ideal earnings into consideration.
Improve your credit score
Your credit score plays a critical role in determining whether you get financial services you need. It can influence your car insurance rates in some states, as well as how much you pay in interest when you get a loan.
Visit annualcreditreport.com to get a free copy of your credit report. You’re typically able to access only one free report a year, but it’s been increased to once a month until April 2021 as a result of COVID-19.
Paying all bills on time and in full and lowering your credit utilization ratio will increase your credit score. Consider taking advantage of score-boosting programs, like ExperianBoost, and don’t apply for new accounts too often.
Cook more meals at home
This may be something you’ve already begun to do with many restaurants around the U.S. being limited to takeout.
Keep it going into 2021. You can make it fun (and easy) with meal subscription services that deliver perfectly measured ingredients straight to your door.
On the other hand, if you’ve turned to takeout during this time, give cooking a try and see how much you save. Put those savings toward debt or your emergency fund.
Update your beneficiaries
Have you experienced a life-changing situation recently? If you have, your beneficiaries might be out of date.
This includes your retirement and bank accounts, insurance policy and other financial accounts to make sure your beneficiaries are accurate.
Adding a beneficiary to your accounts is critical to ensure your assets will go to the person you intended them to. Additionally, it’s important to note that beneficiaries trump wills, so make sure the two documents are aligned in their directives.
Diversify your income
“People are realizing that self-employment is not inherently more risky than traditional employment because there’s built-in income diversification when you have multiple clients or customers,” says Laura Gariepy, business coach and founder of Before You Go Freelance, a blog that offers advice for aspiring freelancers.
There’s a variety of ways you can diversify your revenue streams. Freelance work is great for those who have a specific skill to offer others.
There are also less technical side hustles, like dog walking. If you have a bit more money to front, consider investing in rental properties.