Smart Money Podcast: Spring Cleaning and COVID Taxes

Sean Pyles: Welcome to the NerdWallet's Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.

Liz Weston: And I'm Liz Weston. To have your money questions answered on a future episode, turn to the Nerds. Call or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD or email us at [email protected].

Sean: And hit that subscribe button to get new episodes delivered to your devices every Monday and if you like what you hear, leave us a review.

Liz: This episode, Sean and I are answering a listener's question about how the pandemic is affecting taxes this year, including whether you have to pay taxes on your stimulus payments, but first in our This Week in Your Money segment, Sean and I are talking about one of my favorite subjects: spring cleaning, specifically spring cleaning your finances.

Sean: I'll admit that this is not one of my favorite subjects because for me spring is always a time of getting a little bit messier and less organized after being cooped up inside all winter, seeing all the buds poke out and the flowers breaking through the ground always inspires me to spend as much time as possible in my garden. As a result, I'm typically covered in dirt. And the last thing I want to think about is my finances and how to organize them a little bit. But this year, I actually do have a couple goals that I'm planning to tackle for my spring cleaning. I know that you are really into this, Liz. So how do you typically approach spring cleaning your finances?

Liz: Well, it kind of ties in with taxes. We're digging up all these documents and getting them organized for our CPA. So it's kind of a natural time to start going through the file cabinet and getting rid of as much paper as I can. And my goal for the last many years has been to get everything digitized, everything possible. Fortunately, I've got a CPA that's playing ball now. The previous ones were not always into that, but this one is. It's really helpful to have this stuff digitized, backed up somewhere so that you're not relying on pieces of paper that can get lost or fade. That's the other thing, if you're relying on receipts and stuff, those can fade. So what do you want to do? What's your goal?

Sean: Well, mine is actually around organizing my financial documents because for the past several years, I've started a new shoebox each year and put all of my various documents that I accrue over the year. Even things like random movie tickets, not that I've had one of those recently, but I put all of my tax documents and even statements that I get from my banks into this. And that's what I use as my organizational system, which isn't really much of a system at all. So what I'm planning on doing is checking out the Container Store or Target or something like that, and finding a way to truly have my documents organized by type and by year. But it seems like you are centuries ahead of me in the sense that you are digitizing all of your documents now, which I will admit that makes me a little bit wary of having all of my sensitive information in a purely digital format.

Liz: Now, this is really weird because I have a problem with things going through the mail. I don't have a level of trust that things will get to where they're supposed to go and won't get diverted. So I'm much more comfortable with electronic documents.

Sean: That's so counterintuitive because you think that me, the millennial, would be a lot more comfortable with that purely digital lifestyle. But I think I've been so overexposed to all of the horrible things that can happen on the internet and the way that your information can be scooped up by anyone that really wants it, that I'm wary of having my information only online.

Liz: I can understand that, and a lot of people do like the comfort of having those paper documents, but as I said, things can happen to those documents. Your house can burn down, they can fade, they can get destroyed by a flood or something. So there's lots of secure places in the cloud where you can store things or you can store them on your computer and on a thumb drive. I mean, there's a lots of different ways to do this.

Sean: That's what I was going to ask is what do you think is the most secure way to really have your documents in a digital format?

Liz: I do think a secure cloud storage is an important part of this, and my CPA has secure online uploads. So if you're working with a financial planner or a CPA and they have this option, there's bank-level security on this thing. So I feel perfectly comfortable uploading things and getting my tax returns that way. I feel so much better now than when things were going back and forth through the mail. That was just so terrifying to me because again, that's all that sensitive information just out there in somebody's mailbox.

Sean: Right. Especially since the mail has been so unreliable as of late, it might not be the most secure way to send something like that, especially if it's time-sensitive.

Liz: Yeah, exactly. And then the other part of this is the bulk. I mean, you need to hang onto your documentation for a tax return for at least three years afterwards. And I would say seven years because they have six years to audit you if they suspect you of underreporting your income significantly. So for 2020 tax returns that are filed in 2021, you know, I would just add seven to that. So you would be hanging on to that backup documentation till 2027. And that's a long time. That's a lot of stuff that can pile up over time. So having some of this, at least some of this, digitized could really be helpful.

Sean: Yeah, I'm visualizing my seven years of shoeboxes that I don't have exactly seven years, but I have a good amount that I just keep in my shed, which is locked up. I'll say that, but it's a lot of mass and it's also not a very streamlined way to manage all of this.

Liz: Yes. And you've just told people where to go to find them.

Sean: I don't have a shed. I don't have a shoebox. I swear. Well, what about some other ways that people should think about spring cleaning their finances? I know there's a lot of standard ideas around maybe cleaning out old credit cards from your wallet that you don't use or understanding where you're actually putting your money. I think those things are still valuable to do, so you can kind of check-in with yourself. We're a quarter of the way through 2021 already somehow. So I think it's worth checking in on your financial goals and seeing how you're meeting them for this year.

Liz: Yeah. Just see where your money is going. I mean, the NerdWallet app can help you with this. Just taking a look at the money that's coming in and the money that's going out. A lot of people's finances changed during the pandemic. And you may need to check in to see that money is going where you want it to go, or when your life starts coming back to normal if you made some choices that you want to continue.

Sean: Well, that's the thing is we're beginning to see people's finances rebound. A lot of folks who are getting that $1,400 stimulus check are spending it in all sorts of fantastic ways and even putting some toward savings. So I think it's worth auditing yourself a little bit and thinking about, "OK, now that my life is beginning to stabilize, I might be able to travel again. How do I rein myself in?" That's telling myself at least, “How do I not spend all my money on future trips and other things I want to do that I haven't been able to do for the past year.”

Liz: And I also take a look at my credit cards every year, because I have quite the portfolio, and just make sure that they're still pulling their weight. And this year was again difficult because most of them are travel cards. And most of the time they are very valuable, but they haven't been so much last year. So I'm going to go through and take a look and make sure that we want to keep all the ones that we have.

Sean: And that is one thing I just did. I think we talked a few episodes back about how I had that travel card that had an annual fee. And I ended up switching it over to a different financial product with the same bank that didn't have a fee. And there's a trade-off. This card that I have now does have a foreign transaction fee, but I'm not planning on traveling any time soon internationally. And when that time comes, I'll probably just get a different card.

Liz: The other thing you can do is take a look at your passwords and password manager. If you don't already have one, I highly recommend a password manager, but it is good to change those passwords. You know this: not to use the same one and a bunch of different sites and especially to have unique ones when it comes to your finances.

Sean: Right? Well, that's one thing I also wanted to talk about beyond just managing your finances is cleaning up your digital life in a way. For the past year, since actually we went on our Christmas break, I turned off all email notifications for all of my email accounts.

Liz: Good for you.

Sean: Thank you. I have not missed them at all. I feel like I have a little bit more bandwidth in my life now that I'm not getting pinged every five minutes with whatever I'm getting emailed about. And most importantly, my manager and you have not said anything like I'm not responsive enough, so I'm still managing my workload, but I'm just not being inundated. And I feel like I can approach my emails on my own terms a little bit more.

Liz: Yes. Yeah. So it's not grabbing your attention and diverting you from doing whatever you're doing. Boy, I applaud that. That is a great thing to do.

Sean: Because I'm already on my phone a lot anyway. So I'm going to be checking my email, but I don't really need to be notified about things like that. It's putting conversations like big group chats on mute where you're going to check in on it, but you don't really need to be pinged every time someone's texting you.

Liz: We've got to find that balance between being reachable and being able to get work done.

Sean: And for me, it was turning off notifications. And I have a little smartwatch that I wear and I actually got it because I didn't want to be on my phone as much kind of counterintuitively. It was a way for me to be able to be in touch if I really need to be, but I can still leave my phone at home and go on a walk. I have some music on it. I can get what I want out of my digital life, but I don't feel like I'm being drawn in as readily as if I have my phone on me all the time.

Liz: Very cool.

Sean: Well, anything else you think folks should keep in mind around spring cleaning finances?

Liz: I kind of would like to hear from people what their favorite spring cleaning ritual is with regard to money or if they have one or if they did it the first time just because we talked about it. That would be great to hear, too.

Sean: Yeah, really. Please let us know again, you can call us at Nerd hotline 901-730-6373 or email us at [email protected]. And with that, let's get onto this episode's money question.

Hi, my name is Naomi, and I'm a regular listener of the show. I had a question about the stimulus payments — not the unemployment, but the stimulus checks that came. I got a $1,200 one and $600 one, one of which I received in 2020 and the second one which I received, actually in January, and I was wondering how it will impact our taxes and in particular if one is going to get a 1099 or some document from the government that will need to be included when we are filing taxes. Thank you.

Liz: To help us answer their question on this episode of the podcast, we're talking once again with our go-to tax Nerd, Tina Orem.

Sean: Hi, Tina. Welcome back.

Tina Orem: Hi, everybody. Good to be back. So much has happened in the last year in taxes.

Sean: Oh, man. That is such a true statement. And our listener is wondering if they owe taxes on their stimulus checks. What is the answer?

Tina: OK, so I hear this question a lot, and the good news is that stimulus checks aren't taxable and you don't need to report the money in your gross income when you do your tax returns.

Sean: Awesome.

Tina: It looks like the tax deadline has been extended. Technically, these stimulus checks — the IRS formally calls them economic impact payments — are advances on a tax credit. This all sounds too good to be true. So if you're like me and you want to see exactly where the IRS says this money isn't taxable, you can go to the IRS’s economic impact information center, which has a really big Q and A section. And check out question J2. You don't want to do that because its Q and A section’s really big. NerdWallet's also put together a page that highlights what you need to know about stimulus checks.

Sean: We can link to that on our show notes post. If folks want to look into that further.

Liz: We got a lot of questions about whether the stimulus payments were going to reduce people's refunds and that's not how it works. So go check out those resources so you understand what's actually happening.

Sean: Some people received larger payments than they "should have," will these people owe taxes?

Tina: OK, that's another great question. So here's the deal. If you got “too much” — and that's an air quote — because the IRS used outdated information from your previous tax returns in general, you don't need to return the extra money. And that's amazing, right? So again, if you're like me and you have trust issues and you want to see exactly where the IRS says this, go to the IRS's economic impact information center, and you can check out question J3. Now there are some instances, unfortunately, in which the IRS has explicitly said, it does want you to return the stimulus money. And there are examples. So here are just a couple of examples. One is for the payment is for someone who is deceased — that money, the IRS is asking to return. The second example, you're a non-resident alien. And then, of course, if you're filing a fraudulent tax return, essentially the IRS will want that money back.

Sean: All right. So don't commit fraud and generally just be eligible for this payment. And you'll be fine.

Tina: Well said.

Liz: Now some folks still haven't received their stimulus checks from the last round of payments at the end of 2020. What options do those folks have?

Tina: So if you were eligible for a payment and you just didn't get one, or you didn't get the right amount, you still have an opportunity to true that up by claiming the recovery rebate credit on your 2020 tax return. So there's a worksheet in the instructions to the form 1040, that will help you calculate that. And there's a line on the form 1040, where you can claim the credit, but, you know, decent tax software and a tax preparer should be able to handle this.

Sean: OK, I have a question that's somewhat related. I have a friend who has just been in IRS tax refund limbo for the past 12 months. And she has not received her refund from her taxes last year in part because she filed an addendum of sorts because she forgot to claim her student loan interest. So that really messed things up for her. And she is just wondering, “When am I going to get my refund?” I know some people do kind of fall into this weird place. What do you think someone in that situation should do?

Tina: If you haven't gotten your tax refund yet, there is a way to track your tax refund on the IRS website. Typically the IRS, I think, processes most refunds within 21 days, but how you file is also important. You file electronically, things move faster. If you tell the IRS to do direct deposit with your refund, things go faster. File on paper and you ask them for a paper check, things go much slower. You can be talking weeks or months there.

Sean: One other big change due to the pandemic was a lot of folks received unemployment benefits. And those, unfortunately, in a sadistic way are taxable. Correct? How does that work?

Tina: OK. So unemployment income is indeed taxable income in the eyes of the IRS and your state might also tax unemployment income. By now, you should have received a form 1099-G from the state showing how much unemployment you received in 2020. Don't shove that in a drawer and forget about it. The state sends a copy of that 1099-G to the IRS. So, if you decide not to report your unemployment income on your tax return, there's a decent chance the IRS is at some point going to compare its records to your tax return and notice that something is missing.

Liz: The good news is that the latest COVID relief bill waived the taxes on some of the unemployment benefits that people received last year. If your adjusted gross income was $150,000 or less, up to $10,200 of unemployment benefits are exempted from taxes. If you're married and you both were unemployed, each of you will get that exemption. So $20,400 in total, as long as your adjusted gross income is under that $150,000 mark. Now, if you already filed your tax return, the IRS says it will automatically refund that money. They're asking that you not file an amended return.

Tina: Now, if you're currently getting unemployment, you can have the state withhold a flat 10% for taxes from those payments. And in order to get them to do that, you fill out IRS form W4-V, V as in Victor, and you give it to the state to make that happen. Sending a little money in from each payment like that could help you avoid an unexpected tax bill or an unexpectedly smaller tax refund check when you do your taxes, April of '22.

Liz: So for people who didn't do that or who have a bigger bill than they were expecting, what can they do?

Tina: If you have a tax bill and you can't pay, please hear me telling you that you are not alone and you do have some options. We won't go through all of the options here. It can take a long time and you can check out our tax relief page for a more detailed rundown of what's out there. But a common option is to sign up for an installment plan with the IRS and those you can sign up for online, right on the IRS website.

You don't have to hire someone to do that for you. There are short-term plans that give you about six months to pay your bill. And then there are long-term plans that give you more time to pay. Another interesting thing is you can set up the payments to come out of your bank account every month. So that can automate things. A thing to know is that IRS does charge a fee to set up an installment plan, but the fees range from zero to a couple hundred bucks. And there are discounts for people who qualify as low income. And we have a page on the site that's just about installment plans too.

Sean: And for people who are really unable to pay what they owe the IRS, there is something called an offer in compromise. And that's basically a way to settle your debt with them for less than the original balance.

Liz: You have to be in a world of hurt and your situation is not likely to get better because the IRS has many, many, many ways to collect from you. So the offer in compromise is definitely sort of a last-ditch kind of effort. Before we move off the topic of unemployment, I wanted to add that the rules have changed for two very important credits for working families. These are the earned income tax credit and the additional child tax credit. You have to have earned income to get those credits, but a lot of people didn't have enough or didn't have as much because of unemployment. And so they couldn't trigger those refundable credits. Well, fortunately, Congress has decided that you can use your 2019 income. So we'll include a link in the show notes for more information about that.

Sean: So Tina, are there any other changes to taxes this year, maybe because of COVID or just in general that people should be aware of?

Tina: Remember that filing your tax return and actually paying your tax bill are two different things. That's another thing to remember. So there are penalties for sending your tax return late, and there are other penalties and interest for paying your taxes late too. So if you need more time to prepare your tax return, you can file IRS form 4868 and that will get you an extension until October 15. But remember, getting a tax extension only gives you more time to fill out forms. It doesn't give you more time to pay. I sound like a broken record, but we do have a page if you need more information about that.

Liz: And once again, the American Rescue Plan Act has changed a few things for 2021. It increased the child tax credit and is providing some of that credit in the form of immediate monthly payments that will start in July. The earned income tax credit has also increased for some people as has the child and dependent care credit. And the amount people can put into a dependent care flexible spending account that also increases in 2021. We have information on all of these changes so come to the site and we'll have a link in the show notes.

Sean: Well, thank you so much. We actually put a call out for listeners to send us their questions around filing taxes this year. And if you're OK with it, I want to throw a bonus question at you, Tina.

Tina: Sure.

Sean: So this is from a listener named Nick in Salt Lake City. They wrote, "I filed my taxes very early and because I changed banks after a long move, the IRS did not have my banking information. On the IRS website, I thought I read that without that information, the IRS instructed filers to claim the stimulus on your 2020 return. I did so and submitted. And then last week I got a check in the mail. Do I tear it up, cash it and refile?"

Tina: That is a tricky question. We don't know enough about this person's situation. And we can't really provide personal financial advice about specific tax situations. But I think this is a good opportunity to talk about a few of the rules and tools that you have available to navigate things. So, first, as we talked about earlier, if you got “too much” because the IRS used — and again “too much” is in air quotes — because the IRS used outdated information from your previous tax returns, you don't need to return the money. And the IRS has been pretty explicit about that.

Second, this question is a good excuse to note that if you think you qualify for a stimulus check or you think you got the wrong amount of stimulus check, you can basically true that up with the IRS on your tax return this year. And like I said earlier, there's a new worksheet and the instructions for the form 1040 that'll help you calculate how much to claim and how to get what's owed to you. The last thing I'll say is that there are going to be times when we want to talk to a human about our tax situation. So I'll say here that the main phone number to the IRS is 1-800-829-1040. That's the main line, but it's not the only line.

We have a list of other IRS phone numbers on our website that might help you get help faster. You can also try calling your local IRS field office. And if things get really out of control, there's always the Taxpayer Advocate, which has local offices as well.

Sean: I also want to put in a pitch for people who are calling the IRS to do three things. One be patient, two, be prepared, and three, be kind. I had to deal with calling the IRS a number of years back because I had a tax bill of my own, and I was working out a payment plan and trying to figure out what was really going on because it was kind of a confusing situation. And I found that the more information I had on hand and the less impatient I was on the phone waiting — because you're going to be waiting for probably awhile — and the kinder I was, the person I was talking with — just treating them as a human — the more effective the conversation was. So, just putting that out there.

Tina: Well said.

Sean: Well, Tina, thank you so much for sharing your insights with us.

Tina: Anytime.

Sean: All right. And with that, let's get onto our takeaway tips. And Liz, do you want to kick us off?

Liz: It would be my pleasure. First, stimulus money is not taxable. So use that money to cover your bills, build up an emergency fund or treat yourself.

Sean: Next up: Unemployment income is taxable, but maybe not all of it. Try to get ahead of your tax bill, if you can, by setting aside some money from each check or having it withheld for you.

Liz: Finally, if you can't pay your tax bill, you have options. Look into setting up an installment plan, or if you're really struggling, you may be eligible for an offer in compromise. And that's all we have for this episode. Do you have a money question of your own, turn to the Nerds and call or text us your questions at 901-730-6373 that's 901-730-NERD. You can also email us at [email protected] and also visit nerdwallet.com/podcast for more info on this episode and remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented financial writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.