Americans who pay their taxes quarterly, including those who are self-employed, retirees and investors, have been reminded by the Internal Revenue Service (IRS) that the payment for the first quarter of 2021 is still due April 15. The clarification has been issued to try and avoid the potential for confusion with the tax filing deadline extension that means taxpayers now have until May 17 to get acquainted with the best tax software and file for 2020.
While most people settle their taxes through withholding from paychecks, pension payments, Social Security or unemployment benefits, the self-employed, investors and retirees, for whom a significant portion of their income is not withheld, must make estimated tax payments. Other income where tax is generally not withheld includes interest, dividends, capital gains, alimony and rental income. If estimated taxes aren’t paid each quarter, taxpayers could be subject to penalties.
How to pay estimated taxes
The quickest and simplest method of making an estimated tax payment is via IRS Direct Pay, the app IRS2Go or the Electronic Federal Tax Payment System (EFTPS). Anyone paying by check needs to make it payable to the "United States Treasury." Guidance on estimating taxes can be found in Form 1040-ES, Estimated Tax for Individuals.
Further instructions, including examples and worksheets that are particularly useful for those whose online stock trading efforts have delivered dividend or capital gain income, can be found within Publication 505, Tax Withholding and Estimated Tax.
Automatic unemployment benefit stimulus break
The reminder comes shortly after it was confirmed that taxpayers who fell out of work last year, and have already completed their tax returns, are set to get an automatic refund from the IRS on their unemployment benefits.
The agency says it is taking steps to automatically return money this spring and summer to those who filed reporting unemployment compensation ahead of the recent changes made under the American Rescue Plan. The relief package, signed by President Biden on March 11, allows eligible taxpayers who earned up to $150,000 in modified adjusted gross income to exclude up to $10,200 of unemployment compensation. For those that are married and file jointly, the stimulus tax break doubles to $20,400 of the unemployment benefit received.
Even though the tax deadline has been extended to May 17, the amendment to the rules comes after millions will have already filed their taxes, for whom the IRS says it will make the appropriate change to their returns. If a refund is due as a result, these payments will begin to be disbursed in May, and then continue throughout the summer, or will be applied to any taxes that might be owed.
Should you file an amended return?
According to the IRS, there should be no requirement to file an amended tax return UNLESS the recalculations result in someone becoming newly eligible for additional federal credits and deductions that are not already on their first return.
“For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund,” the agency explains. “However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.”
Those affected in this way are also being advised to review their state tax returns as well. The IRS says it has also been working with the companies that deliver tax software packages to make sure the changes are reflected in the questions asked of those who prepare their tax returns electronically.
IRA contribution deadline extended
The IRS has also announced that taxpayers now have until May 17 for making contributions to individual retirement accounts (IRAs) and health savings accounts (HSAs), and have more time to claim tax refunds for the tax year 2017.
Contributions into both IRAs and HSAs have the potential to be tax deductible, giving taxpayers another opportunity to claw money back from the tax service. Just a few days’ ago, the agency revealed that people now have the opportunity to claim a deduction on the COVID-related personal protection equipment they’ve been buying.
Unclaimed 2017 tax refunds
At the same time, the IRS confirmed that anyone who is yet to claim their refund for the tax year 2017 has also been given until May 17, rather than the normal April 15 deadline, to request the money that they may be owed. It's estimated that Americans will miss out on $1.3bn in 2017-related refunds if they don't act before that date.
Legally, taxpayers have a three-year window of opportunity to claim a refund. If a stake on that money is not made within that period, it becomes property of the U.S. Treasury. Anyone needing to file a prior year tax return to claim these funds has been told they must properly address, mail and ensure their return is postmarked by the May 17, 2021, date.
Reasons to file your taxes online
Those who are urgently waiting on their tax refunds have also recently been given 12 million reasons why it’s better to file your taxes online. That’s the number of paper tax returns that were backlogged at the Internal Revenue Service (IRS) as of the end of last year, according to a new Treasury Inspector General for Tax Administration report. As a result, there’s likely to be many taxpayers who are still yet to receive a refund for last year’s filing season.
Unsurprisingly, it is the fallout from the coronavirus pandemic that has been hampering the IRS’ efforts the most. When people file online, it’s far easier for the IRS to rubber stamp refunds than processing paper returns which is not something that can be easily completed by employees working remotely.
“In 2020, the IRS found itself in uncharted waters, as did the entire nation,” Kenneth Corbin, commissioner of the wage and investment division at the IRS, wrote in reply to the report. “The IRS’ top priority during the COVID-19 outbreak was, and continues to be, protecting the health and safety of taxpayers and the IRS workforce. For that reason, we temporarily scaled back operations, taking such steps as closing our Submission Processing Centers and Taxpayer Assistance Centers, discontinuing face-to-face operations and suspending our telephone helplines.”
Paper jam at the IRS
The volume of paper returns caught in the system represents a huge jump on the 183,000 that were backlogged at the end of 2019. At the same time, the IRS has had to introduce new processes and find the resources to deliver the stimulus payments that have been sent to Americans in light of the pandemic. The third stimulus check is in the process of being distributed now, with some 127 million payments having been sent at the last count.
With staffing numbers already stretched, and the extra responsibility of getting relief payments to Americans a priority, the IRS’ ability to address the backlog that has been built up will be hampered further still. In turn, this inevitably means some people will experience a longer-than-usual delay in getting their tax refund, and their stimulus payments. The agency has already extended the tax season to give filers more time to get their finances in order, and, according to Corbin, has sought authority to hire more staff to alleviate the bottlenecks in the system.
“We are hopeful the benefits of electronic filing have been reinforced with the public and that the experience of 2020 encourages traditional paper return filers to convert to electronic filing,” he added in his response to the report.
Navigating tax season 2021
Even before the backlog came to light, the overwhelming advice for tax season 2021 has been to file taxes online if you want your refund fast. Although the IRS issues a similar message every tax season, the challenges created by the pandemic means it still cannot be reiterated strongly enough.
Choosing the direct deposit option to receive your funds, rather than a mailed check, will ensure a safer and speedier transfer of money too. All told, the IRS predicts it will process more than 160 million tax returns this year, with nine out of ten returns being filed electronically. But while around eight out of ten taxpayers are expected to receive their refunds straight into their bank via direct deposit, IRS Commissioner Chuck Rettig would like to see this number rise even further.
"The pandemic has created a variety of tax law changes and has created some unique circumstances for this filing season," he said. "To avoid issues, the IRS urges taxpayers to take some simple steps to help ensure they get their refund as quickly as possible, starting with filing electronically and using direct deposit.”
How to file taxes online
With coronavirus still a major issue, taxpayers are being encouraged to “stay home and stay safe” and use the online tools available on the IRS website if they can. If you’re happy filling out tax forms electronically, you can do so and then submit your returns online - mailing them is an option too, but should be avoided if at all possible.
Almost everyone can file for free direct with the IRS, while the service also has resources for directing you to a tax preparer if your finances are not so straightforward. Many people also prefer to use their own online tax program at home, which will guide you through the entire process, in a similar way to which the best personal finance software can help you keep on top of your money and budget.
What do I need to file taxes online?
The first step is usually to gather all your tax records together. Not only will this make preparing a tax return easier, it could also bring to light potentially overlooked deductions or credits. As most income is taxable, you should locate documents such as Form W-2 from employers, and Form 1099-MISC if you’re self-employed, a freelancer, or a gig-economy worker.
If you have savings, you’ll need a Form 1099 from banks and other payers to show income from interest, while there are also particular forms covering rental income received by landlords, and investment income. Should you have expenses that you’re allowed to deduct, such as mortgage or student loan interest, Form 1098 will have all the information that you need.
As well as keeping the tax office from your door, file accurately and on time and you can expect to receive any tax refund you’re due in a timely manner too. Most refunds are issued in less than 21 days, and given the impact of COVID-19 on many household finances, it’s money that could be more welcome than ever.
As a side note, if you received a tax refund in 2020 you may also have been paid interest, which is actually taxable and must be reported on your tax return. If you received refund interest totaling $10 or more, you’ll need to complete Form 1099-INT which the IRS should already have sent to you.
When are taxes due?
Following the IRS decision to extend tax season, you now have until Monday May 17, 2021, to file your 2020 tax return and pay any tax owed. If that still isn't long enough, and you’re worried you won’t be able to file on time, you can still ask the IRS for a formal extension to file until October 15. Remember, however, you’ll still need to pay your taxes (or an estimation of them) by May 17 if you want to avoid the unnecessary expense of penalties and interest.
Stimulus checks and tax filing
The main reason tax season 2021 opened later than usual this year was because the IRS needed to prepare for the roll-out of stimulus check 2 at the same time. Now all of those payments have been sent, anyone who hasn’t received any form of relief payment, or have received less than what they thought they would get, must claim missing stimulus payments when filing taxes. If you’re eligible, you can claim the Recovery Rebate Credit on your return, which will either be added to your refund, or set against the tax that you might owe.
What else do I need to know?
With last year’s tax season rather different to most, and a number of other tax changes having been introduced over the year too, the IRS is keen to make sure filers are as well-informed as possible to help avoid mistakes. Make sure you’re aware of the tax-filing reminders that everyone needs to know, particularly if you’ve experienced a change in your employment status over the past year or are part of the gig economy.
If you’ve been working remotely, you’ll also want to familiarise yourself with the rules surrounding home office deductions.