Tax season is in full swing, with many people still looking for last-minute money-saving tips and others wondering if they should file a return.
Additionally, there are some big changes coming for next year’s deposit season that could affect a lot of people.
Here are some of the usual tax tip reminders, plus timely updates:
Reasons to file, even if it is not mandatory
Not everyone needs to file a federal tax return, but there are reasons to, especially this year. In general, you only need to file if your adjusted gross income exceeds the standard deduction you would be entitled to — $12,550 for singles under 65 and $25,100 for married couples, for example. The instructions for IRS Form 1040 provide more details.
Yet a growing list of “refundable” tax credits are available even to people who owe no tax, including some that may end after the 2021 tax year. These credits “have the potential to cause a net payment to the taxpayer,” noted Mark Luscombe, senior federal tax analyst at Wolters Kluwer Tax & Accounting. Here are some of the top refundable credits and other reasons to file:
- The possibility of recovering the excess withholding. If you had more money withheld from a job or other source of income than your tax bill for the year, the only way to get the money back is to file a return, Luscombe said.
- The earned income tax credit. The benefit is designed to “reward taxpayers for their hard work,” said Luscombe, who noted the credit has been expanded significantly for 2021, especially for people who don’t have children.
- Child tax credit. This was partially refundable for years but was improved in 2021 while also becoming fully refundable. However, if you received more credit payments last year than you were entitled to, you may need to repay some or all of the excess.
Other credits that are at least partially refundable for 2021 include the American Opportunity Tax Credit (for education costs), Child and Dependent Care Credit, Premium Tax Credit (certain health insurance costs), and Health Coverage Tax Credit.
A lesser-known retirement incentive
Brokerages and other investment companies usually have lots of educational material to help you select individual retirement accounts, etc., but they don’t seem that eager to promote saver credit. This is partly because the credit applies to low-income earners, not their high-end customers.
Whatever the reason, only 48% of American workers are aware of this tax relief, officially called the Retirement Savings Contribution Credit, according to a survey by the Transamerica Center for Retirement Studies.
Credit isn’t particularly valuable either. It applies to up to $2,000 of voluntary contributions a taxpayer makes to a traditional or Roth IRA and certain other accounts. The actual tax benefit is a fraction of that and varies with income and more. The maximum credit is $1,000 or 50% of an investment of $2,000 per person ($2,000 for married couples).
Yet the credit comes on top of other tax benefits, such as tax-deductible contributions in the case of traditional IRAs and tax-free withdrawals in Roths. Many people may not know that this is an added incentive.
“The idea of a double tax advantage sounds too good to be true,” said Catherine Collinson, president and CEO of the Transamerica Institute.
On the downside, the credit is not available to full-time students or those who can be claimed as dependents. It is also non-refundable like others mentioned above.
IRAs provide last-minute tax relief, for some
Contributing to a traditional IRA is itself one of the few planning tips still available to people looking to reduce their tax debt for 2021.
“Eligible individuals who didn’t save for retirement last year can contribute to an IRA through April 18, 2022 for the 2021 tax year — and may be able to claim the saver’s credit. “, Collinson said.
This filing season, more people could fall under traditional or Roth IRA income limits if they lose their jobs in 2021 or voluntarily take a leave of absence. Eligibility — and how much you can deduct in traditional IRAs — largely depends on your income and whether you or your spouse are covered by workplace retirement programs. Details are available at irs.gov.
Relatively few people contribute new money to all types of IRAs. Confusion over eligibility is a major roadblock, and many workers prefer to direct their dollars to workplace 401(k)s and other plans that offer matching funds to the employer. IRA balances are growing, but this largely reflects transfers or rollovers from 401(k) and similar programs.
Get ready for more accurate reporting
Here’s a tax-heavy new rule that will affect many people in the future: Money you receive on various payment processing apps will now be reported to the IRS, and you’ll receive a Form 1099-K, if your gross proceeds exceeds $600 per year. . The rule does not impose new taxes, but is designed to tighten tax reporting.
“It’s going after the self-employed, gig workers and those with hustles,” said Marc Lamber, attorney at Fennemore Craig in Phoenix. Through increased voluntary tax compliance and greater awareness of existing rules, the IRS expects to generate an additional $1 billion in revenue next year, he said.
The new rule will apply to payment apps including Venmo, PayPal and CashApp, but not to Zelle, which is not a payment app but rather an interbank transaction processor.
One caveat is that you could receive a 1099-K next year for non-taxable personal transactions such as gifts or if you received money from a fellow traveler for their share of your cruise cabin. , or if you took payment from friends for a dinner joint.
Generally, transactions between family members and friends aren’t taxable, but you could still receive a 1099-K that may need to be corrected, Lamber said. That’s why it’s important to start keeping good records now rather than waiting for next year’s filing season.
Again, some taxes might apply on transactions that you might consider personal, such as selling a rare coin, piece of art, or even a used car for a profit.
Should the IRS ease penalties mid-term?
Taxpayer advocacy groups and those supporting tax preparers have called on the IRS to ease penalties as the agency continues to grapple with pandemic-related backlogs. Congress has taken note of proposals such as the Taxpayer Penalty Protection Act or House Bill 5155, which would remove certain penalties if, for example, individuals paid at least 70% of their tax due in the current year.
However, retroactive mid-season tax changes may cause headaches for the public, tax preparers and the IRS and compound the backlog problem, says a group that represents IRS managers. and other federal agencies.
“It’s the job of Congress to pass legislation, which executive agencies like the IRS will gladly execute,” said Chad Hooper, executive director of the Professional Managers Association, in a report. But asking the IRS to do so in the middle of filing season can be very disruptive, he added.
Passing legislation like this would force entire IRS departments to halt their current work and shift gears. And if taxpayers are affected by changes after filing their returns, they may need to file amended returns, further complicating the process.
“This leads to serious delays and confusion and greatly increases the risk of errors, making tax filing season more difficult for everyone involved,” Hooper explained. He encourages Congress to pass tax bills that take effect down the road, not retroactively.
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