Navigating tax filing season may feel like tiptoeing across a financial minefield, but the complicated tax code could actually mean bigger refunds on 2021 taxes for taxpayers who pay attention to the details.
With the Internal Revenue Service poised to begin accepting 2021 tax returns on Jan. 24, both CNN Business and MarketWatch offered the following tips to help filers maximize refund potential and, hopefully, generate some late winter or early spring cash flow in the process.
1. File early and accurately.
So many details associated with filing taxes are outside of a filer’s control, which is why Jerry Zeigler, an enrolled agent and financial counselor who owns JZ Financial Management, told MarketWatch that filers should prepare early and file a return that goes through without delay, accessing all the deductions and credits that can reduce tax liability and boost refund sizes. Specifically, filers should keep track of any correspondence received from the IRS because certain letters (detailed below) will contain documentation needed to accurately file a 2021 return that avoids disputes and delays.
2. Don’t sleep on Dependent Care Credit increase.
The Child and Dependent Care Credit has been expanded significantly to 50% for the 2022 filing season, compared with only 35% in prior years. According to CNN Business, the expanded credit could reduce your tax bill, thereby, increasing your refund, by up to $4,000 for one dependent or $8,000 for two or more. By contrast, the credit’s previous benefits topped out at $1,050 and $2,100, respectively.
3. Direct Child Tax Credit payments made in 2021 represented only about half of what you’re owed.
For the first time, the IRS made advanced monthly payments on this credit that has temporarily been increased to $3,000 per child ages 6 through 17 and $3,600 per child ages 5 and under. The monthly advance payments were paid out between July and December, meaning that you can still claim the other half on your 2021 return. In turn, the IRS is sending Letter 6419, detailing the amount you’ve already received, which you should use to reconcile how much more you are due, CNN Business reported.
Be mindful, though, because the advanced payments were calculated based on either your 2020 or 2019 income and family situation. The final calculation, however, will be based solely on 2021 information, which could vary widely if situations and circumstances have changed dramatically in the past two years, the outlet reported.
4. Claim a Recovery Rebate Credit if you were skipped.
The IRS has disbursed three rounds of Economic Impact Payments to eligible Americans since the onset of the coronavirus pandemic, and the third and final round was distributed in 2021. Filers who received that third payment will receive Letter 6475 detailing how much was received, and that total will need to be reported on your return, CNN Business reported.
Individuals who didn’t qualify for a third Economic Impact Payment, or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information,” the IRS stated.
5. Don’t leave the Earned Income Tax Credit on the table.
The American Rescue Plan tripled the maximum EITC available to $1,502, and for the first - and only - time, low- and moderate-income filers who do not have qualifying children may be eligible.
The EITC pool expansion means that childless workers as young as 19, as well as those aged 65 and older, are eligible for the EITC in 2021 if they meet income requirements. To qualify for the credit, earned 2021 income must be below $21,430 for an individual or $27,380 if married filing jointly, CNN Business reported.
©2022 Cox Media Group