Are you anticipating a sizable refund when you file your taxes for the upcoming season? Keep your feet on the ground.
Last year, the federal government distributed billions of dollars in pandemic relief funds to people in need. Even if you received some of the money, you should expect a reduced return. It could be completely absent in some circumstances.
Prepare for a higher tax burden if you fear you’ll owe Uncle Sam on your 2021 return.
The following information will help you prepare your tax return.
Reasons why you may not receive as much in return
Many taxpayers may have to deal with pandemic-related tax relief for the second year in a row this year…
According to the National Association of Tax Professionals, this year’s tax season could be the most rigorous to date.
The “family stimulus cheques,” which helped millions of Americans pay their rent and other costs last year, are one of the key reasons why your tax return may look different this year.
However, there may be additional reasons why your 2021 refund is less than you expected. It’s possible that you’ll find yourself in need of assistance while you work through this.
Preliminary child tax credit verifications
Temporary increases in maximum credit amounts of $3,000 and $6,000 for children aged 6 to 17 were made possible by the $1.9 trillion American Rescue Plan passed into law in March. Until recently, the credit could be worth up to $2,000 per child.
Families were able to receive half of their benefits early in the form of monthly payments thanks to the relief act as well. In theory, that’s a good thing, but it also implies that Americans should not expect to receive the same tax refund.
Before the credit was increased, a family with 10-year-old twins might receive a $4,000 tax credit. Taking half of the payments early will result in a tax credit of only $3,000 this year, instead of the full $6,000. There was a $1,000 difference between their expectations and this.
Another snag: If your income increased significantly from the previous year, you may be required to repay some of the tax credit money.
The IRS used the most recent data available to compute your advance payments, yet many people were earning less or were out of work totally in 2020. Based on your 2021 income, the IRS may have given you too much money.
A family’s adjusted gross income must be less than $75,000 for a single parent and $150,000 for a married couple filing jointly in order to receive the full increased credit. After that, it gradually diminishes until it disappears entirely for people making $95,000 or more per year or $170,000 for a couple.
Benefits from being laid off
Up to $10,000 in unemployment benefits would be exempt from taxes under Biden’s COVID relief measure. These payments are often taxed like any other income.
Taxes were only excused for the 2020 tax year under the relief measure, however. You will be taxed on any unemployment benefits you received last year. You may see a smaller or non-existent refund this year as a result.
The IRS has already issued or will issue refunds to taxpayers who submitted their tax returns early last year (before the bill was signed) and paid unemployment taxes that were exempt.
However, effective tax software can assist you in sorting out what you’re eligible for and what isn’t.
Paying down student loans and interest is on hold.
Interest paid on federal student loans can be deducted up to $2,500 from a student’s taxable income. They don’t have to itemize their deductions to enjoy the benefit; they can simply remove it from their income.
The pandemic halted federal student loan payments, but Biden set an interest rate freeze of 0% in place. For this year’s tax year, if you accept the government’s offer of a respite, it won’t lower your tax burden. Interest that you didn’t pay can’t be deducted from your taxes.
Prior to the Biden administration’s recent decision to extend the benefit through May 1, all loan payments and interest were set to start in February 2022.
“Stocks,” “crypto,” and “mutual funds.”
Many equities, mutual funds, and cryptocurrencies had a great year in 2018, so if you invested in the markets, you probably got a nice return on your money.
However, if you decide to cash in on any of these savvy investments, you could be in for a costly capital gains tax.
Taxes are usually levied on the proceeds of asset transactions. The length of time you owned the asset before selling will have an impact on the amount of tax you owe.
After owning an asset for more than a year, you may be subject to capital gains taxes ranging from 0% to 20%. Your typical income tax bracket will apply if it was a short-term buy and sell (less than one year).
Who’s going to get the most money back?
This year, the IRS may give you a higher refund if you meet a few conditions.
On the basis of tax returns from 2019 or 2020, the advanced child tax credit payments were made. In other words, if you had a child in 2021, the IRS would have never known, and you would not have earned any early refunds last year.
In this case, you’ll be able to claim a maximum of $3,600 for that child on your tax return.
Biden’s relief proposal also included an expansion of the child and dependent care credit, which can add to your refund.
Prior to the change, parents who worked or were seeking work and hired someone to watch their children could receive a tax credit of up to $3,000 per child.
There is now a maximum credit of $16,000 per child, with a limit of $8,000 per child. There are a number of restrictions, including age, dependant status, and income, that must be met before you may apply.
Preparation for filing: What to know
If you’re looking forward to receiving a refund, you’ll want to file your return as soon as possible because the IRS is currently swamped with previously filed forms that have yet to be processed.
A taxpayer rights group within the IRS, the Taxpayer Advocate Service estimates that 8.3 million individual and modified tax returns were processed as of the end of December.
National taxpayer advocate Erin M. Collins described the year 2021 in her yearly report to Congress as “the most stressful year taxpayers and tax experts have ever experienced.”
Individual tax returns will be processed by the IRS beginning on Jan. 24, but you can begin preparing your return now. For the most part, taxpayers have until April 18 to file their returns and make any required payments.