HOW TO CUT YOUR 2021 TAX BILL
Kiplinger's Personal Finance|March 2022
Our guide will help you claim a higher refund or reduce the amount you owe.
SANDRA BLOCK

When the Tax Cuts and Jobs Act was signed into law in 2017, proponents said it would make filing taxes easier for millions of Americans. It hasn’t worked out that way.

While the tax overhaul nearly doubled the standard deduction, sharply reducing the number of taxpayers who need to itemize deductions, taxes have become even more fraught for millions of taxpayers. In part, that’s because lawmakers have tweaked the tax code to provide credits and deductions for non-itemizers. Those tax breaks could lower your tax bill but also require more work when it comes time to file.

In addition, as Congress scrambled to prevent the COVID-19 pandemic from torpedoing the economy, it funneled billions in economic stimulus payments through the IRS in the form of tax credits. When you file your 2021 tax return, you may need to reconcile those credits to claim funds you should have received or, in a few cases, pay some of that money back.

In the next few pages, we’ll walk you through the tax-filing minefield. We’ll alert you to tax breaks you may overlook, and help you decide whether you should do your own taxes or pay a professional. And we’ll look at whether IRS customer service, which was so bad during last year’s tax filing season that only 10% of taxpayers got through to an IRS representative, will improve for this year’s filing season.

As has always been the case, our first piece of advice is to start early. By now, you should have received all of the documents you need to file, such as your W-2 and 1099 forms from your financial service providers. Filing early means you’ll get your refund more quickly; if you owe money, it’s better to learn that now than on April 18 (this year’s federal tax filing deadline for most taxpayers). It’s also a lot easier to find a qualified tax preparer in February or March than it is in April. And filing early will protect you from outlaws who use stolen personal information to file bogus tax returns so they can claim fraudulent refunds.

KIPTIP

How to Report Your Stimulus Credits

In response to the pandemic, Congress approved billions of stimulus dollars, many in the form of tax credits. When you file your 2021 tax return, you’ll have the opportunity to claim credits you should have received. In some cases, you may have to pay some of that money back.

Stimulus checks. A major part of the stimulus came in the form of economic-impact payments sent directly to taxpayers. The third stimulus check, which provided taxpayers with up to $1,400, plus $1,400 for each of their qualifying dependents, went out last spring. While the credit is for 2021, it was based on your 2020 tax return. If you didn’t get a check or received one for less than you’re eligible to receive based on your 2021 income, you can claim it when you file your 2021 tax return. The IRS says it will send out letters to taxpayers detailing the amount of the third stimulus check they received. You’ll need this information to claim any credit you’re due. And here’s some good news: If you received more money than you’re eligible to receive based on your 2021 income, you don’t have to pay it back.

Expanded child tax credit. The American Rescue Plan, which was enacted in March 2021, increased the maximum amount of the child tax credit to $3,000 (from $2,000) for children 6 to 17 years old and to $3,600 for kids 5 years old and younger. The bill also directed the IRS to pay half of the total credit amount in advance through monthly payments issued from July to December 2021. But unlike the stimulus payments, taxpayers may have to pay some of that money back.

The IRS is using taxpayers’ 2020 tax returns to calculate their tax credit. If your credit came up short, you can claim it when you file your 2021 tax return. But if your 2021 income increased to the extent that your eligibility was partially or completely phased out, you could end up with a lower-than-expected refund or a bigger tax bill.

This calculation is complicated by the fact that there are two phaseouts in effect. The higher tax credit ($3,000 to $3,600) phases out if your modified AGI exceeds $75,000 for single tax returns or $150,000 for married couples. Families who have modified AGIs greater than those thresholds are eligible for the regular credit of $2,000 per child, but the credit phases out when their MAGI exceeds $400,000 for singles or $450,000 for married couples.

You could also owe money if your filing status changed or you claim the child tax credit for fewer children in 2021 than you did in 2020. This can happen, for example, if you claimed your child as a dependent on your 2020 tax return but your ex-spouse claims the child as a dependent for 2021.

The amount you’ll have to repay—if any—will depend on your 2021 modified adjusted gross income. Parents with 2021 modified AGI of no greater than $40,000 (single filers) or $60,000 (joint filers) won’t have to give back any child tax credit overpayments. Families with a modified AGI from $40,000 to $80,000 (single filers) or $60,000 to $120,000 (joint filers) will need to repay a portion of any overpayment. Parents with modified AGIs above those amounts will have to pay back the entire amount of any overpayment.

Want Your Refund Fast? File Electronically

The IRS Tax Advocate also warns the agency will continue to struggle with tight budgets and backlogs.

During last year’s tax-filing season, fewer than 10% of taxpayers who called the IRS were able to get a representative on the phone. Millions of taxpayers still haven’t received their 2020 refunds. Kiplinger’s spoke with Erin Collins, the IRS National Taxpayer Advocate, about what taxpayers can expect during this year’s filing season.

What were the primary reasons for IRS backlogs in 2021, and will the situation improve this year? The last filing season was extremely difficult for many taxpayers, practitioners and the IRS. At the end of 2020, more than 11 million tax returns had not been processed, and that carried over to 2021 season. We’re going to have a similar situation this year. We’ve also had COVID-19 restrictions for employees, and the IRS has had continued reductions in budgets.

Since the beginning of the pandemic, Congress has approved three economic stimulus payments and monthly advance child tax credit payments. How has that affected the IRS’s ability to provide customer service? The IRS only has a finite amount of resources. Getting those checks out the door takes staff away from what they need to do every day. I’m concerned that during this filing season, we had the third stimulus check and the advance child tax credit, and there’s some confusion over those payments. Some people had a life event where maybe they had a new child or their income changed, which could increase or decrease their payments. The IRS is going to have to reconcile some of those tax returns, and that will require manual processing.

What can taxpayers do to reduce the likelihood that their refunds will be delayed this year? File electronically. That’s the easiest thing you can do that will be a time saver. If you’re getting a refund, direct deposit really speeds the time to process the payment. If you received a stimulus payment and/or an advance child tax credit payment, you should try to make sure your information matches what the IRS has. The IRS has been sending out letters to taxpayers who received the advance child tax credit that show how much they received last year and the number of dependents it used to determine that amount. It’s doing the same for the third economic stimulus payment. (With the child tax credit, you can also go to www.irs .gov/creditsdeductions/child-taxcreditupdateportal to look up the amount of your payments.) Taxpayers can use these letters to make sure the number they put on their return is consistent with IRS records.

What’s your advice for someone who decides they need professional help with their taxes this year? If you qualify, the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly are good resources. They get a lot of training from the IRS and are free for lower-income taxpayers. Go to www.irs.gov to find a location near you. If you’re able to pay to hire someone, you want to check their credentials. Use a licensed preparer, whether it’s a certified public accountant or enrolled agent, who has had the proper training to prepare tax returns. Some of the unlicensed preparers may have good intentions, but they may not be as familiar with the laws and changes in the laws.

While the problems in 2021 were extreme, taxpayers have complained about the IRS for years. What needs to be done to make long-term improvements in how the agency deals with taxpayers? The simple answer is funding. The IRS budget has been depleted for the past decade, which has reduced its ability to hire. The IRS brings in about 95% of the country’s budget. You hear a lot of jokes about the IRS but it performs a very critical function, and Congress has called on them to assist in administering social programs. It’s a vital organization for the country that needs to be fed, and the problem is, it’s been starved.

STRATEGIES FOR NON-ITEMIZERS

In the past, non-itemizers who were charitably inclined had to hope that they’d be rewarded in the afterlife because they didn’t get any tax breaks in this one. But in response to the pandemic, which placed higher demands on many charitable organizations, Congress created a new tax break for philanthropic non-itemizers. For 2021, taxpayers who claim the standard deduction can deduct up to $300 of cash donations to charity. The $300 amount is per person, so if you’re married, you can deduct a total of $600 on your 2021 tax return.

The deduction is limited to cash contributions; contributions of clothing and household goods to your local Goodwill aren’t eligible. Donations to donor-advised funds aren’t eligible, either. Keep a record of your contribution with your tax documents. For donations of less than $250, you need a bank record, such as a canceled check or credit card statement. For donations of $250 or more, you should obtain a written acknowledgement from the charity that shows the date of the contribution and the amount and states whether you received any goods or services in exchange for your donation.

The kids are alright. Raising a family is expensive, and luckily, most child-friendly tax breaks are available to taxpayers who claim the standard deduction.

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