Did COVID impact your finances in 2020? Here’s what you can do about your taxes

Taxes are complex. Taxes during a pandemic are on another level entirely, especially when we consider the financial difficulty so many have experienced in the last year.

Luckily, there are tax professionals who can help us make sense of it all, and help us to get the most out of our returns.

I sat down with Mary Tonita Austin, Founder and CEO of MT Austin and Associates, LLC, a financial services company, and founder of The Wealth Activator. Austin is an expert in comprehensive accounting services for individuals, non-profits and small business owners, and she shared ways that people can get ready for the 2021 tax season if they were financially impacted by the pandemic.

If COVID impacted your finances in 2020, what are some options people have with taxes?

Austin: I would say definitely do some research about the new CARES Act and any type of credits that you could possibly get for COVID. If you were impacted financially, there are a lot of state grants that can help you pay your mortgage and your rent. Go to your county or your senator. They actually have money that’s not always publicized to help with utilities and rent and other things.

There’s the ability on the IRS website…to…estimate what your tax liability will be so that it’s not a punch in the stomach when you get your taxes prepared. If you’re self-employed, you could check as the sole proprietor. There’s a check you can do with your W-2. Because, again, a lot of people come, and they’re like, “I didn’t think I would owe money,” or a situation changed, especially if you have a new child, and you might get more money back than you were expecting. If you think you’re going to owe a lot, at least you’ll be prepared and have time to come up with that money.

Are payment plans available to pay your taxes?

Austin: Yes, there are payment plans through the IRS that you can apply for at the time that you file your return. So, you don’t have to pay it all at one time. There are interest and penalties, but interest is [about] 0.25%. It’s fairly small.

So, I would save now if you know that you’re going to owe. If you needed to pay estimated taxes, it’s good to pay those now so that you don’t get hit with a penalty for underpayment, which could be possible. However, if [you are a sole proprietor and] is your first year as a sole proprietor, you won’t be penalized for not submitting your estimated taxes.

If someone had a baby in 2020 and is therefore eligible for the child tax credit, what should they do to prepare?

Austin: If you had a baby before the end of the year, just make sure you have their Social Security numbers. Sometimes, especially now, getting that information from the Social Security Administration can lag, if you’ve mailed something in. You want to really start following up with that and make sure you get those documents so that you have a Social Security number to put on your tax return.

Are there childcare considerations people should be aware of when preparing their taxes?

Austin: Yes. If you have childcare through a church or something that isn’t the typical childcare facility that doesn’t track what you’re paying them very well, just make sure you get a statement from them. I know a lot of times people pay cash or pay under the table, but you want to just get a hold of that, so you know how much that you were paying. You typically can only get a childcare credit if you have a Social Security number or Tax Identification number from that person. So, if there’s someone that you use regularly, then you want to have that conversation with them because you can’t get a credit for that expense on your tax return.

And if you have a business, then you can deduct that [childcare expense] on your business tax return, but you can’t do both. A lot of people don’t know that. If they have a sole proprietorship, whatever they need to allow them to work or gain income, they can write it off as a deduction. Especially now; whereas before you would have a couple of hours if you have a school-aged child, a couple of hours of free time because they’re in school, [during the pandemic] with them being schooled at home, you may have to hire someone to give you that free time. And if you are a business owner, then you can deduct what you’ve paid them. So, these are good things that can reduce your taxable income as much as possible.

That’s good to know! Are there any other ways to help make taxes less painful this year?

Austin: File your return electronically. The IRS is swamped with mailed tax returns; [they] have limited staff and your return will surely take longer to process if you submit by mail.

Whether you’re preparing your taxes yourself or hiring a tax preparer, make sure you have all of the documents you need before you get started. You will need to know how much you received in stimulus payments, and especially during the pandemic, you may need to download tax forms that you typically get by mail.

You’ll also need to have your 1099 G form if you collected unemployment, and if you are self-employed and experienced a loss of income as a result of contracting COVID or caring for a dependent with COVID, you are eligible for a sick and family leave tax credit. Lastly, not many know this, but if your taxes are not complex and you meet the income guidelines, you may qualify to have your taxes done for free. The on-site and e-file providers are listed on the IRS website and there may be a limited number of on-site providers due to the pandemic so I would get on their list sooner than later.