Though 2020 may finally be behind us, many people have yet to recover from the tumult of the past year.
Given that we're still grappling with a widespread outbreak and shaky economy, the last thing you want to do this year is fall victim to tax mistakes. Here are a few to steer clear of at all costs.
1. Filing your return late
This year's tax filing deadline is currently April 15. Last year, the IRS extended the deadline by three months to give filers more time to cope with the ongoing pandemic. Back then, the coronavirus outbreak came as a shock. This year, the pandemic is already a part of life, so the IRS probably won't grant extra leeway. Prepare for that and start gathering your tax documents in January. Being late with your taxes could result in costly penalties. Plus, if you're owed a refund, you probably don't want to delay it, especially if your income has taken a hit during the pandemic or you're otherwise struggling financially.
2. Not declaring unemployment income
Millions of Americans have lost their jobs during the pandemic. If you were one of them, you might've received quite a bit of income in unemployment benefits. If you didn't have taxes withheld on those benefits, you'll need to prepare to pay up when you file your taxes. Don't forget to declare those benefits on your tax return. Failing to report any sort of income could have serious consequences and result in expensive penalties.
3. Selling investments too soon
The stock market is starting out on a high note this year, so you may have investments in your portfolio that you're able to sell at a gain. Be careful -- if you take capital gains before holding your investments for at least a year and a day, you'll be taxed at the short-term rate, which is the same marginal tax rate at which ordinary income is taxed. The result? You'll pay the IRS a lot more.
4. Not maxing out your IRA or 401(k)
The IRS makes it easier to save for retirement by giving you a tax break on contributions to a traditional IRA or 401(k) plan. It pays to do your best to max out your contributions this year. The more money you put into one of these plans, the less earnings the IRS will tax you on. If you're under 50, your annual contributions max out at $6,000 for an IRA or $19,500 for a 401(k). If you're 50 or older, these limits increase to $7,000 and $26,000, respectively.
5. Submitting a paper return
The IRS is still catching up on paper tax returns from 2020. You should plan to file your taxes electronically this year to avoid a delay in getting your refund. Submitting an electronic return could also help you avoid errors that cause your taxes to get audited or rejected.
With any luck, 2021 will be a year of economic recovery. A good way to contribute to your own financial recovery is to be as tax-savvy as possible. Avoid these mistakes so you don't wind up hurting yourself needlessly in the next 12 months.