The 2021 tax-filing season officially gets underway Feb. 12, when the IRS starts accepting 2020 tax returns and the clock thus starts counting down until April 15.
If you hope to get a tax refund this year — or even if you simply hope to get a bigger refund next year — here are several things you should know.
1. Electronic filing and direct deposit speed your refund
Filing your tax return electronically and opting to receive your refund via direct deposit into your bank account — rather than, say, via mailed check — is the best way to speed your refund, according to the IRS.
Filing electronically also is the best way to minimize errors, which in themselves can delay your refund. The IRS explains:
“Even though the IRS issues most refunds in less than 21 days, some tax returns require additional review and take longer to process than others. This may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud.”
2. You can split your refund between multiple accounts
Another benefit of receiving your refund by direct deposit is that you will be able to choose between having the entire amount sent to one account or having it split up between two or three. These can be bank accounts or individual retirement accounts.
So, you could have a portion of your refund deposited into your checking account, another portion into your savings account and the rest into your IRA, for example.
Of course, Uncle Sam also gives you the option to use your refund to buy up to $5,000 in U.S. savings bonds.
Breaking up your refund in any of these ways is easiest if you use tax software or tell your tax professional, but you also can do it on paper using IRS Form 8888.
3. Filing early helps keep crooks’ hands off your refund
Filing your taxes early on helps keep criminals from exploiting your tax information for their own gain.
As we explain in “Beware These 6 Income Tax Scams,” thieves who get hold of your personal information can then turn around and file a tax return in your name:
“They use your name, address, Social Security number and other personal data to fill out and file a fake tax return in your name. Then, they get a big refund. Meanwhile, the IRS rejects your actual return because the agency thinks you already filed. The problem can be fixed, but it’s a giant headache.”
The earlier in the tax-filing season that you file your return, the less time crooks have to pull off such a scheme.
4. Rushing your return can slow your refund
While it’s smart to file your tax return sooner rather than later, there is such a thing as filing too soon.
The IRS urges taxpayers to have all their 2020 tax documents, such as Form W-2, in hand before filing their 2020 return. This will help avoid errors and thus avoid refund delays.
“Taxpayers need their W-2s to file accurate tax returns, as the form shows an employee’s income and taxes withheld for the year,” the IRS explains.
Other types of tax documents you would need in hand before filing might include:
- Form 1099-INT (for interest income)
- Form SSA-1099 (annual Social Security benefit statement)
- Form 1099-R (for numerous types of retirement income)
5. Claiming certain tax credits can slow your refund
If you claim the earned income tax credit or the additional child tax credit, the IRS won’t issue your refund before mid-February. This is required by law and applies to your whole refund, not just the portion from either of those tax credits.
The IRS says it expects that most refunds related to either of those credits will reach taxpayers by the first week of March, assuming taxpayers choose direct deposit and their returns have no other issues.
6. This year, you may be able to use your 2019 income to fatten your refund
Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, taxpayers may use their 2019 earned income, rather than their 2020 earned income, to determine if they qualify for the earned income tax credit and, if so, to calculate how much the credit is worth for them this year. (The same “look-back” provision also applies to the additional child tax credit.)
The IRS describes the earned income tax credit as “the federal government’s largest refundable federal income tax credit for low- to moderate-income workers.”
Allowing these workers to use their 2019 earned income to calculate the credit this year means more stand to benefit from the credit. The IRS explains:
“To qualify for EITC, people must have earned income, so this option may help workers who earned less in 2020, or received unemployment income instead of their regular wages, get bigger tax credits and larger refunds …”
Because the earned income tax credit is refundable, eligible taxpayers receive the full amount of the credit that they qualify for in their refund, even if they don’t owe taxes.
7. You can check the status of your refund online
Generally, refund information will be available via the online tool and mobile app within 24 hours of the IRS acknowledging receipt of an electronically filed tax return, the IRS says.
8. It might be time to adjust your withholding
If you are disappointed by this year’s tax refund — or even worse, if you find that you owe money — you can avoid a similar fate next year by adjusting your withholding now.
Having more money taken out of your paycheck — or even your retirement income — for taxes throughout the year will mean you are less likely to owe money to Uncle Sam at tax time, and more likely to get a refund.
Of course, getting a refund is not necessarily a good thing. It means you effectively gave an interest-free loan to the government.
That is another reason why adjusting your withholding now is smart. You can do this online using the IRS Tax Withholding Estimator tool.
If you decide to adjust the withholding from your paycheck, fill out a new Form W-4 to give your employer.
To adjust the withholding from Social Security benefits, use Form W-4V as we detail in “An Easy Way to Avoid a Tax Day Bill on Your Social Security Income.” To adjust withholding from a pension, annuity or certain other types of deferred compensation, use Form W-4P.
9. You can make your refund more valuable
Like any windfall, a tax refund could be worth more than its face value — if you put it to use in a way that saves you money or builds your wealth.
Article courtesy of MSN Money.