The holiday season is over, and tax season is here. By the end of this month, you’ll start receiving tax-related forms from the IRS, your employer, and other relevant entities. (We’ll talk a little bit about two new papers you’ll receive later in this article.) While it’s always a good idea to file your return early if you can, it’s important not to rush the process. It’s easy to get in a rhythm when your taxes are the same year after year, but there were a few changes in 2021 to be aware of for your taxes this year. Keep reading to learn more.
Reconciling Your Economic Impact Payments
Last year, the US government sent out three economic impact payments—which you might better know as stimulus checks—to taxpayers. This is a source of income that most people have never seen before, and there were a lot of questions about how these would impact tax returns. As a refresher, here’s how these payments worked:
In order to expedite the issuing of these payments, the federal government utilized the IRS. To do this, they had to create a new tax credit for all taxpayers, then provide advanced payments to everyone for that credit. The fact that it was considered a tax advance made many people concerned that they would have to repay that amount. However, because it was an advance on a brand-new, one-time credit, most people won’t see any difference in their returns as a result of these stimulus checks.
Sometime this month, the IRS will send you Letter 6475 (one of those new tax papers we mentioned earlier). This letter will state the total amount you received in economic impact payments last year. If you received less than the full amount—which was three payments of $1,200—you should compare what you received to what you qualified for. If you got less than what you should have, you can claim an additional recovery rebate credit on your 2021 tax return. If you were overpaid, don’t worry; the IRS has put provisions in place so that you don’t have to repay the excess amount.
Comparing Your Advance Child Tax Credit Payments
Along a similar vein, you should take the time this tax season to compare your advance child tax credit payment with the amount you qualified for in 2021. Advanced payments on the child tax credit are yet another type of income most people have never seen before. In addition to advancing those payments to parents, President Biden also increased the credit amount for 2021. Letter 6419 should also arrive in your mailbox this month, and it will detail the amount you received last year. If you were paid less than what you should have been, you can claim an additional credit; if you were paid more, you may have to repay a portion, but you should consult with your CPA on this.
Unlike the economic impact payments, this advance payment on your child tax credit may have an effect on your tax return. Most parents would have received a child tax credit when they filed their return, but if you already claimed this credit via advance payments, you cannot claim it again when you file. This means you might see a slightly larger tax bill or a smaller refund.
Claiming Your Additional Charitable Deduction
Deductions for charitable contributions have been around for a long time, but most people don’t have to worry about claiming them on their returns. This is because the standard deduction offers most people the biggest tax benefit and makes filing your taxes easier. However, if you made cash contributions to a qualifying charity this year, make sure you don’t miss out on a new, additional charitable deduction. This year, taxpayers can deduct the amount they donated—up to $300 for individuals or up to $600 for joint filers—on top of their standard deduction amount.
While this might sound like a small amount, the additional reduction in your taxable income can be extremely beneficial. Please note that this deduction is for cash donations only, and not for the donation of goods, property, or other non-cash items.
Changes to tax laws occur every year, and some changes will affect more people than others. These three changes, however, will affect almost every tax filer in the country, so make sure you take the time to go over these items and ensure you’re receiving the amount you deserve. If you need assistance with filing or desire further explanation on how these changes affect you, we encourage you to reach out to us. Schedule a consultation with one of our CPAs today, and get your taxes filed early.
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