It’s no surprise that last year was unique in many ways, but even for your tax returns it was a different year for many people. Don’t worry, we have tax tips for you! Due to the pandemic, you might want to give your tax return a little bit of extra attention before finalizing everything.
4 Tax Tips for Investors
Tax Tip #1: Start Preparing Early
There were some major financial changes we experienced in 2020 thanks to the coronavirus. The IRS issued approximately 160 million Economic Impact Payments which totaled over $270 billion, some small businesses received Paycheck Protection Program loans to stay afloat and millions of Americans filed for unemployment.
With all of this economic uncertainty, tax filers should work with their tax preparer to determine how government assistance received in 2020 will be reflected when filing in 2021. While the deadline is exactly ONE month away, there is still time to gather everything you need to file. Don’t wait until April 14th to get started.
Tax Tip #2: Report All Earnings
Seven years ago, the IRS aggressively enhanced its ability to match income reporting to find possibilities of underreported income, particularly with those who receive 1099 and 1098 interest reporting. To best avoid penalties or an audit, report everything you know you earned, even if it was never paid as a paycheck – such as prize money, dividends or another form of passive income.
Tax Tip #3: Don’t Claim It If You Can’t Prove It
If a tax filer claims a deduction on their taxes, they need to be able to prove it with the proper documentation or paperwork. When it comes to your taxes, especially with investments, the more documentation the better. Even if you take the standard deduction, it’s in your best interest to have all of the necessary documentation ready if needed.
There’s a lot of this type of play in the investor world, whether it’s real estate preparation costs for house-flipping or broker commissions for stock trades. Either way, you need receipts and objective documentation to prove your costs. No matter how experienced your opinion is, that simply is not enough evidence.
Tax Tip #4: Think About Going Long
Day trading seemed to make a comeback in popularity in 2020. Just keep in mind that your capital gains taxes will be higher if they are short-term capital gains and not long-term capital gains. Lower taxes is just another benefit to longer-term investing.
The 2021 tax filing will be a big change for some, but that doesn’t mean you can’t plan for it. If this past year has taught us anything, it’s the importance of being prepared, so the earlier you start working on your taxes, the more room you have to maneuver and make the necessary changes. If you need help creating a plan for your investments and potential taxes, let us know! Click here to schedule an initial call with one of our team members. There is no cost or obligation!