2022 tax season: What to know about 2021 taxes
We continued to battle a pandemic and economic ups and downs throughout 2021, and all the turmoil has resulted in some tax changes for many of us. Before you prepare to file your taxes this spring, make sure you’re aware of how the changes might affect you. Start by reviewing the reminders below and taking time to understand how tax filing might look different for you this year.
Did you take the Child Tax Credit early?
In 2021, the Child Tax Credit increased to a maximum of $3,000 for each child between the ages of five and 17 and $3,600 for each child five and under. Many families received Child Tax Credit payments in advance during 2021, as the government paid out half the tax credit over the final six months of the year. Those families can take the remaining half when they file their 2021 taxes.
If you received advance Child Tax Credit payments, you should receive a letter in the mail from the IRS, Letter 6419. This letter should include the full amount of advance payments you received and the number of children used to calculate those advance payments. You’ll need this letter to file your taxes this spring and to make sure you receive the appropriate remaining amount of your Child Tax Credit.
Also, keep in mind that if you typically receive the Child Tax Credit but you took it in cash during 2021, you may owe more in taxes than expected in April 2022.
How does a job change affect taxes?
During 2021, more than 38 million Americans left their jobs1 as part of “the Great Resignation.” If you were one of those people, your tax bill could have changed along with your employment.
If you got a new, higher-paying job, it may have moved you into a higher tax bracket. In that case, you may owe more than usual. Check with your new employer to make sure they are withholding the correct amount of taxes from your paycheck.
If you quit your job before getting a new one, or took a new job with a pay cut, your income may have been lower in 2021. In that case, you may have dropped into a lower tax bracket. That could also mean you end up with a tax refund after filing.
Did you take unemployment benefits during 2021 while in between jobs? If so, you may need to report that income on your tax return. Check to see if your state requires it. Unemployment income is reported on IRS Form 1099-G.
What about deductions?
In 2021, the standard deduction rose to $12,550 for individual filers and $25,100 for married couples filing jointly. People aged 65 and older can add an extra $1,350 per person for married filers or $1,700 for single filers.
As a result of the pandemic, the IRS made it easier to deduct charitable contributions. In 2020, the IRS allowed you to take a $300 charitable contribution deduction per tax return on top of the standard deduction; previously, you were required to itemize deductions in order to take a charitable deduction. For 2021, some taxpayers can deduct even more for charitable contributions: You’re allowed to take a $300 per person charitable deduction, so if you’re married and file jointly with the standard deduction, you can deduct up to $600 for charitable contributions.
People who choose to itemize deductions can take even more. Prior to the pandemic, you could deduct charitable contributions in an amount equal to up to 60 percent of your income. In 2020, the IRS raised the limit to 100 percent, and this change was extended through 2021. So this year, you can deduct an amount equal to 100 percent of your income for charitable deductions, if you choose to itemize.
How are retirement plans affected by tax changes?
Traditionally, people with tax-advantaged retirement accounts who have reached the age of 70½ are required to take minimum distributions from their retirement plans each year. When you contributed the monies to your traditional 401(k) or traditional IRA, you didn’t have to pay taxes on it, but by the time you reach 70½, the government was ready to take its cut. By requiring distributions after a certain age, the government can start getting back the taxes it allowed you to defer. (If you contributed to a Roth account, you paid taxes on the funds before contributing, so you won’t have to pay taxes upon qualified withdrawal—and there are no required distributions.)
During 2020, the required minimum distribution from your tax-advantaged retirement account was waived as a result of the pandemic, but it’s back for 2021. Seniors who were at least 72 years old by the end of 2021 were required to take their required distributions from tax-advantaged retirement accounts (except Roth accounts) by Dec. 31, 2021. If you turned 72 during 2021, you have until April 1, 2022 to take your first distribution and December 31, 2022 to take your 2022 distribution.
You can calculate the amount you’re required to take using the IRS tables. It’s important to make sure you’re taking at least the minimum distribution. If you do not take the required minimum distribution by the deadline, the IRS will charge you a 50 percent tax on the money you were supposed to take.
As the IRS already has a backlog of unfinished returns from last year, leaders are urging filers to be extra cautious about filing accurate returns this year to avoid delays.2 By understanding the changes on the horizon, you can be better prepared to file quickly and accurately.
1 2021 was the year of the quit: For 7 months, millions of workers have been leaving. Business Insider, December 8, 2021.