Preparing for tax season
Tax preparation season is in full swing.
Last week was the first day when 2021 returns could be filed with the IRS. Employers, custodians and other groups were supposed to issue W-2s and 1099s by Jan. 31, although some people are still waiting. Often, brokerage statements are the last to arrive at taxpayers’ homes.
We have been told that there will not be extension to the April 18 filing deadline this year. If you have not completed your return by that date, there is a 180-day tax form extension, but all estimated taxes are still due by April 18th. It is estimated that 6 million taxpayers are still waiting to get last year’s return back.
There are some changes for 2021 returns compared to the previous years. Some things increase because of inflation. One of them is the amount of free money a married filing jointly return receives. Last year it was $24,800. This year it has increased $300 to $25,100.
This means the first money you earn up to this limit is not taxed no matter what the source. It could be earned income, Social Security, interest, dividends, company profit or any other thing.
Taxpayers who are legally blind or over 65 get an additional $1,350 free of taxation. Everyone who is legally blind gets this no matter what your income level is.
Single filers, head of household and married filing separately get different amounts of free money.
The tax brackets stayed the same tax rate as last year, but they did expand in size a little. This means you can earn a few more dollars than last year before you move to a higher tax bracket. The first two tax brackets are 10% and 12%. The next two jump quite a bit to 22% and 24%.
If you have a lot of qualified funds such as 401ks and IRAs, you might want to do some tax planning for 2022. Unfortunately, most people do reactive tax planning instead of proactive. There is currently very little you can do to lower your current tax bill. There is a lot you can do to try and lower future tax bills.
This year, people age 72 and older are required to take out their required minimum distributions from all qualified accounts. Last year, the Cares Act waived this requirement but if you do not take the distributions out this year, you are subject to a 50% penalty. That is one of the highest in the tax code.
Most people do not itemize since the last tax changes. The standard deduction was increased so much that people pay less when using it. This means that most taxpayers do not get to deduct charitable contributions. This year, you can receive $300 per person, up to $600 per return, even if you do not itemize. This was done to encourage contributions to food banks and other important causes.
Last year in the middle of tax filing season, the IRS changed the rules and made the first $10,400 of unemployment payments non-taxable. This year, they are taxable again as is usual.
There have also been some temporary increases in the Child Tax credit. It was increased, and part of the funds were available during the year. Your tax return will reconcile these payments and some people who had more income than expected may owe more taxes.
We cannot cover every change is the space of one column, but we will discuss other changes and ways to reduce future taxes in a later column.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”
If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.