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Tips to Get Ready and Plan for 2020 Tax Returns

Posted on December 22, 2020

Dear Client,

We hope that you and your family are staying safe and healthy.

Can’t believe 2020 is almost over but can’t wait to put the year 2020 behind us, either!

While we are getting ready to send our 2020 tax organizer early January, we would like to list here the important tax updates that may impact you.

Here are some of the changes and issues you may need to know about.

Unemployment compensation: Expanded unemployment insurance benefits were available to many taxpayers due to the COVID-19 pandemic. California does not tax unemployment compensation, but the federal government does. If you received unemployment compensation, even if you elected to have federal income taxes withheld, it’s likely that the withholding was insufficient to cover your tax liability. Be sure to contact us early so we can determine whether you have additional tax liabilities before the April 15 payment deadline.

Stimulus payments: The CARES Act, which was passed into law to help stimulate the economy during the COVID-19 pandemic, authorized stimulus payments (also referred to as economic impact payments) that were issued to many taxpayers. People who received economic impact payments should have received IRS Notice 1444, Your Economic Impact Payment, notifying them of the amount of the payment they should have received. The economic impact payments are treated as advance tax credits against your 2020 income taxes. As such, you will need to include a copy of Notice 1444 when you provide us with your other tax documents.

Property transactions: Did you sell any real estate this year? Be sure to provide copies of escrow statements, as well as the Loan Estimate form, the Closing Disclosure form, and California Form 593, Real Estate Withholding Tax Statement. We need these documents to properly prepare your return. If you can get them to us as early as possible, we can make sure that we have everything we need and that any state withholding documentation is correct.

California introduced penalties for failure to carry health insurance: The federal government repealed the penalty for failure to maintain health insurance (referred to as the “individual mandate”) starting with the 2019 tax year. In response to the federal government’s repeal, the state of California will charge an individual who fails to secure coverage an annual penalty of $695 or more when they file their 2020 California tax return. The minimum penalty for families of four or more individuals is $2,085. The penalty can rise as high as 2.5% of household income, which can be many thousands of dollars. Be sure to maintain your health insurance coverage to avoid this costly California tax penalty.

1099s and K-1s: If you received 1099s or K-1s from investments in 2020, we may extend your return in case these documents are corrected after the original filing deadline. We are seeing increasing numbers of corrected information returns, which require taxpayers to amend their original tax returns to reflect the corrected amounts. In some cases, the amounts are vastly different and can create additional costs in amending the tax returns and potential penalty problems.

Foreign accounts: We must report overseas assets owned by businesses as well as individuals. So, the reporting requirements are increasing and the penalties for failure to report continue to be harsh. Not all foreign holdings must be reported. If, for example, you hold stock in a foreign company through a U.S. broker, those holdings do not have to be separately reported. However, if you hold any other types of foreign assets, including bank accounts and securities accounts, please let us know. If you have any doubt as to whether any of your assets are foreign, please discuss those assets with us. Again, this year we will need information on a business’ foreign holdings as well.

Please take extra care in preparing your organizer and tax documentation so we can do the best possible job to find new tax benefits that are hidden in the law and protect you from more aggressive audit programs and larger penalties.

Call, email or text us – our team is ready and able year-round for all your tax questions and concerns.

Cheers to 2021!