Three tax changes to know before filing your return
2021 unemployment benefits will be subject to tax
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The 2022 tax season is underway and marks the third straight tax season disrupted by the pandemic.
Before the first returns were even submitted to the Internal Revenue Service (IRS), the agency told families and businesses to be prepared for a bumpy tax filing season. IRS Commissioner Chuck Rettig said earlier this month that "in many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs. This is frustrating for taxpayers, for IRS employees and for me."
IOWA WEIGHS PROPOSAL TO SHIELD RETIREMENT INCOME FROM TAXES
Unfortunately for taxpayers, they cannot forego participating in this tax filing season, which runs until April 18th for taxpayers in most states.
In fact, many families may have more tax items to navigate this year than ever before, all while working with an IRS that is increasingly underwater.
Here are the top three changes taxpayers should be aware of:
Didn’t Receive Your Economic Impact Payments? Now Is the Time to Claim Them
The federal government sent out three rounds of "Economic Impact Payments" over the course of the pandemic, including a $1,400 payment last spring as part of the American Rescue Plan (ARP). These payments were made available for single filers earning under $75,000 and families earning under $150,000.
If you are still waiting on that payment, tax filing season is the time to let the IRS know that. For example, families with new children born last year may be able to claim an additional $1,400 credit on their return. It is also important to remember that any adjustment on your return for stimulus payments will be in the taxpayer’s favor, so you will not have to repay tax on payments sent out last year.
A Bigger Child Tax Credit May Lead to a Smaller Refund
As many people point out, your tax refund is just an interest-free loan you give to the government throughout the year. Despite this fact, many families use tax refunds as an opportunity to fulfill important financial obligations, like putting a down payment on a new vehicle, planning for a family vacation, or renovating their home.
As part of the ARP, the size of the child tax credit increased from $2,000 to $3,000 for older children and to $3,600 for younger children. These payments also started going out on a monthly basis and were made available to all households with children. Typically, households claim the entire credit at tax filing season, but this past year, families received up to half of their child tax credit in advance.
TIPS FOR THE CURRENT TAX SEASON
If you received those advanced payments throughout the year, that may impact the size of your refund. Some families may have a larger refund if they had never received the credit before. If you received the full child tax credit in prior years, it may lead to a smaller refund because a part of the credit was already sent out last year.
This does not mean that your taxes were raised or that you are missing out on potential tax benefits. It simply means that funds that you were used to receiving as part of your annual refund were distributed to you earlier and in smaller sums.
Unemployment Benefits Will Be Subject to Tax
As part of pandemic relief, the U.S. substantially increased federal unemployment benefits in 2020 and 2021. While filing taxes in 2021, the first $10,200 in unemployment benefits were exempt from federal income tax.
That is not the case this year—unemployment benefits will once again be taxed as ordinary income, making it important for those who received benefits to check how much was withheld from their taxes. Taxpayers in most situations are automatically opted into tax withholding for unemployment benefits, which will hopefully minimize the risk of a surprise tax bill.
This tax season will be bumpy. The IRS has a backlog of over 8 million returns from last year that still need to be processed, and it is getting harder for taxpayers to get in touch with the IRS. It will be very important for the IRS to quickly get back on track as Americans start to submit their returns this month, but with some basic tax knowledge, taxpayers can also reduce the risk that their tax return is delayed.
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Garrett Watson is a senior policy analyst at the Tax Foundation, a nonpartisan think tank in Washington, D.C.