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Yep, it’s about that time—tax time, of course.
The sun’s out a little longer, we shed a few layers, the first blooms of the season are on full display, and taxes are due smack dab in the middle of it all. This year, your 2021 taxes are due on April 18th, 2022.
But don’t let this impending annual chore dull your spring fever.
This year, let’s make taxes fun! Well, if not fun, at least creative.
Given the many legislative changes we’ve experienced over the last year, there are a handful of unique considerations for your tax return. Let’s take a look.
1. Be Mindful of The New Standard Deduction
Think about the standard deduction like “passing go” for itemizing. It represents the guaranteed amount you can deduct from your income.
Suppose you have deductions, like mortgage interest, student loan interest, or charitable giving that exceed the standard amount. In that case, you can “pass go” and itemize those, removing even more from what the government “counts” as your taxable income for that year.
The IRS adjusts the standard deduction each year to account for inflation. Here are the numbers to know.
2021 Standard Deduction:
- Single, $12,550
- Head of Household, $18,800
- Married Filing Jointly, $25,100
You’ll use the 2021 numbers for your return this April. But the 2022 numbers are as follows.
2022 Standard Deduction:
- Single, $12,950
- Head of Household, $19,400
- Married Filing Jointly, $25,900
It’s smart to keep these figures in mind as you consider additional deductions throughout the year. With the limits so high, many families can’t itemize every year.
But there are ways to take advantage of the years where you can itemize, like bunching charitable donations, having higher than typical medical costs, being eligible for home office deductions, and more.
Keep an eye out for an opportunity to itemize, as it can save you a lot of money come tax time.
2. Know Which Expenses You Can Actually Deduct
When it comes to tax deductions, the possibilities may seem endless, but the reality of being able to claim them is far more complicated. Most credits and deductions come with income thresholds and other technicalities that eliminate your eligibility.
Here are a few common deductions to consider.
There are three typical deductions homeowners may have heard of. Here’s a breakdown, including some rule changes you won’t want to miss.
The mortgage interest on your home loan: If you bought your house after December 16, 2017, you can deduct the interest you paid on the first $750,000 of the loan.
Qualifying mortgage insurance premiums: Did you put less than 20% down when buying your house? If so, chances are you have private mortgage insurance (PMI). The good news is that you can at least deduct those expenses if you itemize. However, as soon as your modified adjusted gross income (MAGI) hits $100,000, your deductions phase-out, and once you hit $109,000, you can’t take the deduction at all.
Home equity loan interest: If you took out a home equity loan to spruce up some rooms or re-do the backyard, you can’t claim a deduction on the interest you paid.
Student loan interest
There aren’t too many positives to student loans, but one pretty big plus is that you can deduct up to $2,500 in interest you pay on them. Plus, this is an above-the-line deduction, meaning you don’t have to itemize to take advantage of it.
But before you get too jazzed, there are income limits you’ll need to watch out for.
- You can claim the full deduction if your MAGI is under $70,000 filing single or $140,000 jointly.
- If you’re between $70,000 and $85,000 ($170,000 respectively), your deductions phase out.
- You can no longer take the deduction once you exceed $85,000 filing single or $170,000 married filing jointly.
Were your healthcare costs bananas over the last year? If so, you may be able to write them off on your tax return. The IRS permits you to deduct expenses that went over 7.5% of your adjusted gross income. So, if your AGI was $100,000, you can deduct any medical expenses over $7,500. You do have to itemize to take this deduction.
Yes, you’re a work-from-home boss. But unless you’re actually the boss, aka self-employed, you can’t take a home office deduction.
If you are self-employed, you have several deductions at your disposal, like home-office set up, travel, business supplies, continuing education, contract labor, and more.
3. Read IRS Letter 6475
Those monthly payments from the advanced child tax credit sure were nice, huh?
But if you received more than you’re technically eligible for, it’s time to pay the piper, so to speak. In January, the IRS began issuing Letter 6475, which essentially details all the stimulus money you received, or what they term your Economic Impact Payment (EIP) in 2021.
This letter concentrates on the third round of stimulus payments, which the government issued between March and December 2021, and any “plus-ups” (extra income based on your last tax return).
In essence, the government wants to make sure that the numbers you have are the ones they have and fix any discrepancies.
There are a couple of possible outcomes.
The IRS didn’t pay you enough, and you may be eligible to claim the recovery rebate credit. When would that happen? New parents, this one is for you! If you recently added a little bundle of joy into your life, you can claim the child as a qualifying dependent.
The IRS paid you too much, and you have to settle the tab. A situation like this could happen where you receive more money than you’re eligible to claim, like in the advanced child tax credit payments.
This document will be super helpful when you file your taxes, so be sure to save a copy for yourself and your CPA/tax professional. If you misplace it, don’t sweat it. The IRS is keeping everything up to date in your online account.
4. Know If COVID-19 Legislation Could Impact Your Taxes
Yep, we’re still talking about the pandemic, and specific provisions could affect your 2021 tax return. Let’s take a look.
- Stimulus checks. Remember these payments? The ones you for sure used to invest, save, or pay down debt? The government sent a third round of stimulus checks, $1,400 for individuals and every qualifying dependent as part of the American Rescue Plan passed in March 2021. Breathe a sigh of relief because this cash doesn’t count as income on your taxes—yay, free money!
- Unemployment benefits. To help offer relief to the many people who found themselves out of work in 2020, the government made the first $10,200 of unemployment benefits tax-free, but that’s not the case for 2021. So, if you collected unemployment benefits and didn’t withhold taxes, you’ll have to pay the government back.
- Charitable giving. Most of the time, you must itemize to see the tax benefits from charitable giving. But the CARES Act expanded the ability to deduct cash contributions even if you take the standard deduction. For your 2021 return, you can deduct up to $300 or $600 if married filing jointly in qualifying contributions.
5. Review Your Freelance Income
Did you bring in a lot of money via freelance work, a side-hustle, or a passive income stream? First, that’s awesome! Second, there are some tax details you won’t want to forget.
Collect Your Documents
Be sure you have all the 1099s from any job or service you performed.
Pay Quarterly Taxes
If you’re bringing in a decent amount of income, $400 or more, outside of your W-2 job, it may be wise to withhold and pay quarterly taxes because the IRS could slap you with an underpayment penalty come tax time.
Adjust Your Withholdings
If your income jumped significantly, adjusting your withholdings is also a good idea. Withholding too much gives the government an interest-free loan on your money, and withholding too little may mean that you owe a lot when April rolls around.
Reviewing this strategy is especially beneficial in dual-income households. In fact, if one spouse is a W-2 employee and the other is a freelancer, the W-2 employee can over withhold for their spouse with the contract, 1099 income. You can use this calculator from the IRS to help determine how much you should have your employer withhold for your federal income tax.
Look Into a SEP-IRA
You may be able to earn some money on the side, stash it away for retirement, and get a tax break if you’re eligible to invest in a SEP-IRA. With this plan, you can contribute up to 25% of your net earnings from self-employment income, like freelancing or teaching a summer class, up to $58,000 for 2021, and $61,000 for 2022.
You can contribute to a SEP-IRA if you have a self-employed business, even if you participate in an employer’s retirement plan at another job. So, if your employer’s benefits aren’t all that great—no match, suspended benefits, etc.—you can look to contribute more to your SEP-IRA. Check with your CPA or financial planner to see if this could be an option for you!
Your taxes will likely be more complex when you have freelance or gig-work income. But that’s okay! Be sure to save your receipts, keep meticulous records, and pay your taxes on time.
6. Max Out Your 2021 Investment Accounts
While most deadlines for annual contributions are December 31, a few trickle into the new year. If you find yourself with some extra cash on your hands, here are a couple of excellent ways to use it.
- Invest in your HSA. You can still put funds into your 2021 HSA until April 18, 2022. As a reminder, the 2021 annual limits are $3,600 for self coverage and $7,200 for family coverage. (This number includes any employer contributions).
- Fund your IRA. In 2021, you can contribute up to $6,000 in an IRA—traditional or Roth. You also have until April 18 to fully fund these accounts. You may decide to do a Backdoor Roth if you’re a good candidate.
Your contributions may lower your taxable income, like in the case of an HSA or deductible traditional IRA. Plus, they also support your future, giving the investments more time to grow and compound.
Wave Goodbye To 2021
The tax deadline to file your 2021 return is April 18, 2022.
If you/your tax pro needs more time, you can file an extension until October 17, 2022. Keep in mind that if you owe money, you’ll still want to make a tax payment by April 18, 2022, because filing an extension doesn’t give you more time to pay your taxes, just more time to file them. The IRS doesn’t get happy when you don’t pay them back, leading to fees and penalties. So, even if you have to wait to file your return, be sure you pay what you owe by the deadline.
Expecting a refund? Be sure to file your taxes earlier rather than later. The earlier you file, the sooner you’ll have access to your check. If you wait until the deadline, your refund may take longer than anticipated since millions of other people file simultaneously.
If you do get a refund, what should you do with it? While it may be tempting to hit the new spring clothing lines or treat yourself to a nice meal, there are some more financially savvy ways to make the most of that check, including,
- Pay down (or off) high-interest rate debt, like a credit card
- Replenish your emergency fund
- Put a portion into your investments or brokerage account (aka, your “yes” fund)
- Redirect some money to something fun like summer travel savings or upgrading your patio furniture.
Now, you can turn your attention to this year’s financial hopes, possibilities, and opportunities.
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