Be tax ready: Understand how life changes may affect the 2020 tax return filed this year

FS-2021-02, February 2021

On February 12, the IRS will begin processing 2020 tax returns. This year for the first time, the Form 1040 and Form 1040-SR are available in Spanish. There are also some other changes and some special circumstances related to COVID-19 that the IRS wants taxpayers to think about before filing.

People facing financial difficulties may find that there's a tax impact to certain events, such as job loss, debt forgiveness or tapping a retirement fund. In addition, the information on a taxpayer's 2020 tax return may look different from their 2019 tax return. Individuals can check the "What Ifs" for Struggling Taxpayers page for some scenarios that may have a tax impact for families.

Understanding how last year's changes affected individuals and families and their tax return is important. The IRS developed this fact sheet to explain what taxpayers need to know about filing a complete and accurate tax return, claiming credits and deductions, getting a refund timely and meeting tax responsibilities.

File a complete and accurate return electronically to avoid refund delays

Everyone should organize tax records to make preparing a tax return easier. The safest and most accurate way to file a tax return is to file electronically. The IRS expects about 90% of individuals to file federal returns electronically. E-filed returns have fewer errors, which means fewer delays.

Do taxes for free online or in person

The IRS partners with tax software providers and community organizations nationwide. IRS Free File and Free File Fillable Forms offer free tax preparation products for nearly all taxpayers. Taxpayers don't even need a computer; they can use a smartphone. Free File offers free online tax return prep and free electronic filing. Individuals can also check out Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE)  to find a location near them where volunteers can help prepare taxes. It's important to note that some VITA/TCE sites are helping taxpayers remotely and others remain closed because of COVID-19.

Military service members, qualifying family members and some veterans are eligible to use free MilTax services to prepare and electronically file their federal and state tax returns.

Get tax refunds electronically

Filing electronically and choosing direct deposit remains the fastest and safest way to file an accurate income tax return and receive a refund. Eight out of 10 taxpayers get their refunds by using direct deposit. The IRS uses the same electronic transfer system to deposit tax refunds that is used by other federal agencies to deposit nearly 98% of all Social Security and Veterans Affairs benefits into millions of accounts.

Make tax payments electronically

If a person owes tax, they can make electronic payments online, by phone or from a mobile device. Paying electronically is safe and secure. The IRS uses the latest encryption technology and doesn't store bank account numbers used to submit a payment. When taxpayers use any of the IRS electronic payment options, it puts them in control of paying their tax bill and gives peace of mind. They determine the payment date and receive an immediate confi­rmation from the IRS. It's easy, secure, and much quicker than mailing in a check or money order. Go to IRS.gov/payments to see all the electronic payment options. Note that the IRS Direct Pay system is free.

View tax account information online

Taxpayers can access their account online to view the amount owed, payment plan information, payment history, scheduled and pending payments, digital copies of select notices and key information from their most recent tax return as originally filed.

Individuals can also check the amounts of Economic Impact Payments through their online account. This can help accurately calculate any Recovery Rebate Credit on a 2020 tax return.

For questions about how to create an account or how to reset the username or password, see IRS.gov/secureaccess.

Identity Protection PIN available nationwide

New this year, all taxpayers can voluntarily opt into the IP PIN program by using the Get an IP PIN tool at IRS.gov/ippin. The six-digit IP PIN prevents identity thieves from filing a tax return with their Social Security number. This adds an extra layer of protection for taxpayers against tax-related identity theft by requiring the PIN they create to be used when their tax return is filed electronically. Taxpayers must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if they also can pass the identity proofing process. Taxpayers can review what is needed to verify their identities at IRS.gov/secureaccess.

Unemployment benefits are taxable

Millions of Americans received unemployment compensation in 2020, many of them for the first time. These taxpayers may be unaware that the money received through this program is taxable income.  Unemployment benefits are taxable income if they're received under the unemployment compensation laws of the United States or of a state.

This includes that extra $600 per week individuals might have received in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for in the Federal Pandemic Unemployment Compensation program.

Individuals are encouraged to use the IRS interactive tool - Are Payments I Receive for Being Unemployed Taxable? - and answer questions about unemployment benefits to help them determine if they're taxable.

If a person received unemployment compensation in 2020, they should receive Form 1099-G, Certain Government Payments, showing the amount paid in Box 1 and any federal income tax the person elected to have withheld in Box 4. The IRS will receive a copy as well. Some states do not mail Form 1099-G, and individuals will need to get the electronic version from the state's website.

Individuals who receive a Form 1099-G for unemployment compensation they did not receive should contact their state tax agency and request a corrected Form 1099-G. States should not issue Forms 1099-Gs to taxpayers they know to be victims of identity theft involving unemployment compensation. Taxpayers who are victims of identity theft involving unemployment compensation should not file an identity theft affidavit with the IRS.

To avoid refund delays, taxpayers should file a complete and accurate return that includes any unemployment compensation received in 2020.

Gig economy work is taxable

The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it's through a digital platform like an app or website. Individuals must file a tax return if they have net earnings from self-employment of $400 or more from gig work, even if it's a side job, part-time or temporary.

Check eligibility for tax credits

With changes to income and other life events for many in 2020, tax credits and deductions can mean more money in a taxpayer's pocket and thinking about eligibility before filing can help make tax filing easier.

Certain credits may lead to a refund even if a person owes no tax. Some people may find that they're newly eligible for certain tax credits, such as the Earned Income Tax Credit (EITC) or the Recovery Rebate Credit.

Now more than ever, the IRS urges people to check and see if they qualify for credits and to claim them when they file. People can use the IRS Interactive Tax Assistant to help determine if they're eligible to claim certain credits and deductions. Individuals must file a federal income tax return — even if they aren't otherwise required to file — and specifically claim certain credits.

Earned Income Tax Credit eligibility

The EITC is the federal government's largest refundable federal income tax credit for low- to moderate-income workers. If an individual qualifies, they can use the credit to reduce the taxes owed – and maybe increase their refund. For example, the EITC is worth as much as $6,660 for a family with three or more children or up to $538 for taxpayers who do not have a qualifying child.

For people who have earned income from working for someone or running a business or farm, it's money that can positively change their life, family and community. Four out of five eligible taxpayers receive the EITC. This means millions of taxpayers are putting EITC dollars to work for them. But missing that one in five means millions of people are not taking advantage of this valuable credit they earned. Almost a third of those who qualify for EITC qualify for the first time this year due to changes in their marital, parental or financial status.

There's a new EITC rule that can help people whose income was less in 2020 than 2019 or received unemployment income that cannot be used to qualify for the EITC. A person may elect to use their 2019 earned income to figure the Earned Income Tax Credit if their earned income was more in 2019 than in 2020. This change may help workers get bigger tax credits and larger refunds when they file their 2020 tax return this year. Taxpayers should use their 2019 earned income if it helps them qualify for more EITC.

Taxpayers earning $56,854 or less can see if they qualify using the EITC Assistant, available in English and Spanish. The tool helps determine eligibility, qualifying children, and estimates the amount of the EITC a person may get. If an individual doesn't qualify for the EITC, the Assistant explains why.

Additional Child Tax Credit (ACTC) eligibility

The ACTC is for certain individuals who get less than the full amount of the Child Tax Credit. Like the EITC, when filing a 2020 tax return, individuals may be able to use their 2019 earned income to figure the ACTC if their earned income was more in 2019 than in 2020. Again, it is typically better to choose the option that results in the larger credit. See the instructions for Form 8812 for more information.

Refunds for returns claiming the EITC or ACTC may take longer

By law, the IRS cannot issue refunds before mid-February 2021 for returns that properly claim the EITC or the ACTC. This time frame applies to the entire refund, not just the part that's related to the credit. Early EITC and ACTC filers should see refunds in their bank accounts or on debit cards by the first week of March if they file electronically with direct deposit and there are no issues with their tax returns. The IRS cannot answer refund status inquiries unless it has been 21 days since the tax return was filed electronically. That 21-day time frame begins on February 12 or when the IRS accepts the tax return, whichever is later. However, taxpayers can check Where's my refund? on IRS.gov or the IRS2Go app for a personalized refund date as soon as 24 hours after the tax return is electronically submitted. This is the best way to monitor the status of a refund. Most early EITC/ACTC filers should see an update to WMR by February 22.

Eligibility for other credits

Taxpayers may qualify for credits like the Child Tax Credit and Child and Dependent Care Credit. Taxpayers whose dependent does not qualify for the CTC might be able to claim the Credit for Other Dependents. Individuals paying higher education costs for themselves, a spouse or a dependent, may be eligible to save some money with education tax credits or deductions.

Cash charitable contribution deduction without itemizing

Taxpayers who choose the standard deduction may be eligible to take a charitable deduction for cash contributions up to $300 made to qualifying charities in 2020 without having to itemize. The deduction lowers both adjusted gross income and taxable income – translating into tax savings for those who made donations. Use the IRS Interactive Tax Assistant tool - Can I Deduct My Charitable Contributions? – and answer questions about cash donations to get more information.

IRA contributions after age 70½

For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs. Individuals can make tax-deductible IRA contributions past age 70½. In addition, they may be able to claim a deduction on their individual federal income tax return for the amount contributed to the IRA. See IRA Deduction Limits. Taxpayers can make contributions to IRAs until April 15, 2021 and still deduct that amount on their 2020 tax return if eligible.

Also, some taxpayers found it necessary to take coronavirus-related early distributions from 401(k) plans and traditional IRAs in 2020. Under the CARES Act, those distributions – up to $100,000 – are not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

Recovery Rebate Credit and Economic Impact Payments

Economic Impact Payments are commonly referred to as stimulus payments. Economic Impact Payments were based on a taxpayer's 2018 or 2019 tax year information. The Recovery Rebate Credit is similar except that the eligibility and the amount are based on 2020 information on a person's tax return.

Economic Impact Payments were issued to eligible individuals in two rounds – the first payment was $1,200 per adult, plus $500 for each qualifying child and the second payment was $600 per adult, plus $600 for each qualifying child. These payments are not taxable.

The Recovery Rebate Credit is a tax credit against the 2020 income tax. Generally, the Recovery Rebate Credit will increase the amount of a tax refund or decrease the amount of the tax owed on 2020 tax return.

Most people who are eligible have already received the full amount for the Recovery Rebate Credit as Economic Impact Payments. If a person did receive the full amount for both Economic Impact Payments, they shouldn't include any information about it when they file their 2020 tax return.

A change in income could make a person eligible for the Recovery Rebate Credit. For example, some people may have received less than the full Economic Impact Payments because their incomes were too high in 2019 and they can claim the Recovery Rebate Credit based on 2020 income. Or, if a person was claimed as a dependent on someone else's tax return in 2018 or 2019 but cannot be claimed as a dependent on someone else's return in 2020, they may now be eligible for a Recovery Rebate Credit.

If a person is eligible – and either didn't receive Economic Impact Payments or they think they qualify for more than received – they can claim the Recovery Rebate Credit when filing their 2020 tax return. Individuals must file a 2020 tax return to claim the Recovery Rebate Credit even if they are not normally required to file. Go to IRS.gov/rrc for more information.

Refund interest payments are taxable

In general, the IRS paid interest on individual 2019 refunds on returns filed by July 15, 2020. The interest covered the time from April 15, 2020 until the date of the refund. These refund interest payments are taxable, and taxpayers must report the interest on their 2020 tax return. The IRS will send Form 1099-INT on interest over $10 paid in 2020 no later than February 1, 2021.

Renew expiring ITINs

If a person used an Individual Tax Identification Number (ITIN) to file, they should make sure it hasn't expired. Go to IRS.gov/itin for more information.

New Schedule LEP, request for change in language preference

This tax season, individuals can use the new Schedule LEP to state a preference to receive written communications from the IRS in a language other than English.

Most refunds sent in less than 21 days; some require further review and take longer

Just as each tax return is unique, so is each taxpayer's refund. Different factors can affect the timing of a tax refund after the IRS receives the tax return. The fastest way to get a refund is to file electronically and use direct deposit. Taxpayers will receive a refund much faster than if they mail a paper return and request a paper check in the mail.

Although the IRS issues most refunds in less than 21 days after a tax return is processed, the IRS cautions taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Some returns may require additional review and may take longer to process. This may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud. The IRS, along with its partners in the tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud.

The IRS will contact taxpayers by mail when more information is needed to process a return.

Also, taxpayers should take into consideration the time it takes for the financial institution to post payments to an account or to receive a check in the mail. Most financial institutions do not process payments on weekends or holidays, which can also affect timing for any payments.

Refund information will generally be available within 24 hours after the IRS acknowledges receipt of an electronically filed return on the Where's My Refund? ‎tool on IRS.gov and the IRS2Go app.

The IRS cannot answer refund status inquiries unless it has been 21 days since a taxpayer filed a tax return electronically. That 21-day time frame begins on February 12 or when the IRS accepts the tax return, whichever is later.

Taxpayers should file returns by April 15 even if they can't pay the full tax owed

If a taxpayer believes they may have trouble paying a tax bill by the April 15 due date, they should not panic. They should still file the tax return even if they are unable to pay in full. They should pay as much as they can to avoid penalties and interest. Filing timely is especially important because the late-filing penalty and late-payment penalty on unpaid taxes add up quickly.

The IRS offers payment options, such as a short-term extension to pay, a payment plan or an Offer in Compromise, or a request to temporarily delay the collection process until the taxpayer's financial situation improves. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills.

Help available on IRS.gov for fastest service

IRS.gov has around-the-clock information available and is the fastest way to get assistance. Millions of people use IRS.gov to help file and pay taxes, get information about their accounts and get answers to tax questions.

Taxpayers are encouraged to find out if a life event makes them eligible for credits they didn't qualify for in the past. The IRS Interactive Tax Assistant is a tool that provides answers to many tax law questions. It can determine if a type of income is taxable, if a person is eligible to claim certain credits, or if they can deduct expenses on their tax return. It also provides answers for general questions, such as determining filing status, claiming dependents, or if a person even needs to file a tax return.

The Let Us Help You page helps answer most tax questions, and the IRS Services Guide PDF links to these and other IRS services.