An extraordinary year brings extraordinary change

The Internal Revenue Service announced that taxpayers may file tax returns beginning on February 12, 2021, when the IRS begins processing 2020 tax year returns. Before engaging in tax preparation, tax return preparers and clients can benefit from some pre-filing organization to help move the process along more smoothly.

2020 was a year filled with personal and financial obstacles due to health and economic uncertainty heightened by the COVID-19 Pandemic. Significant non-tax legislation, which was enacted during the pandemic, as well as specific COVID-related legislation that created many changes to individual and corporate tax laws. The SECURE Act (passed at the end of 2019) introduced changes to retirement plans effective for the first time in 2020. The CARES Act, and other COVID legislation included significant provisions such as the Paycheck Protection Program (PPP) small business loan opportunities, individual taxpayer relief in the form of economic impact payments and the potential for delayed required minimum distributions from qualified retirement accounts.

Supporting tax preparers during tax season

Given the myriad of tax changes that occurred during 2020, collecting, organizing and understanding what items are necessary for the tax return preparer to complete a timely filed tax return is essential. Individuals should compile any documentation regarding their PPP loan and forgiveness information. Documentation includes any Economic Impact Payment letters, information about any children born in 2020, employer information regarding any payroll credit changes, and qualified retirement plan information including any plan loans, withdrawals and distributions received, not taken or recontributed in 2020. 

Due to the pandemic, many individuals were not able to enter their workplace and were required to work from a remote location. Those who worked from a location outside of the state of their employer or usual location, may have to file a state income tax return in a different state or multiple states. These individuals should organize data which catalogs dates worked from various locations to help return preparers decide what state income tax returns are required.

Also, taxpayers should gather any documentation regarding business location modification, business closures and expenses, unique fees incurred because of COVID-19, tax filings made directly by businesses, operating business losses, state or local grants, unemployment compensation Form 1099s, personal loans made to businesses, etc. This type of information will be required by tax preparers prior to filings tax returns.

For those individuals who participated in year-end income and/or transfer tax planning, their CPA or attorney may not have been intricately involved in the detail of transactions. All parties should be brought up to date regarding any gifts, sales, or other tax-related transactions made in 2020.  For example, valuation documentation, contracts, installment notes, trusts, closing statements, etc. should be made available to accurately report any transaction affecting the filing of the 2020 tax return.

What's next?

We know where we came from and all the unexpected challenges and opportunities that 2020 brought. We can bring value to our clients’ tax preparers by helping clients gather, organize and understand the relevant tax information needed to make this a successful tax season for everyone involved. With the experiences of 2020 behind us, we can be better prepared to tackle 2021!

About the authors

Robert Appel is a Vice President of National Design/Advanced Planning at Lincoln Financial Network. In his role, he is responsible for supporting advisors with their clients, financial planning needs including case design, analytic support and legal and legislative interpretation. He also provides coaching and conceptual sales training. His previous experience includes serving as a Senior Tax Consultant and Assistant Manager of Financial Services for financial services firms. He was in private practice of law and continues to be a consultant to other attorneys and law firms. A member of the American Bar Association, he studied Accounting and Finance at Central Connecticut State University, received a JD degree from what is now the Quinnipiac University School of Law, an MBA (Finance) degree from the University of Connecticut, and LL.M. (Taxation) degree from Boston University School of Law.

Donna Rowan is Assistant Vice President of Lincoln Financial Network's National Design/Advanced Planning. Donna's expertise is in advanced planning case design, providing taxation support and consultation to Lincoln Financial Network financial professionals and other tax specialists throughout the country, developing financial planning designs that provide effective client solutions and alternatives. Donna received a BA degree in English from State University of New York at Buffalo and a J.D. from Western New England College School of Law. Additionally, she received her LL.M. in taxation from Boston University School of Law. Donna is a member of the Connecticut and American Bar Associations and has also obtained her CLU and ChFC designations from The American College of Financial Services.