Well, here’s a topic I hate to bring up this early in the year, but it’s time to think about filing your 2021 income taxes sometime in the next two months. Because of holidays, the official tax filing deadline this spring will be April 18. But the IRS forms will be made available in the next two weeks so you can start the process.
Yes, I know that many of you haven’t even received your 2020 tax refunds from the return you filed LAST spring! It’s no secret that the IRS is bogged down. A recent Wall Street Journal article highlighted the problems the IRS is having — delayed refunds, slow updates on their website and employees that cannot help, even if you do reach them by telephone.
Eric Smith, IRS spokesperson, attributed the delays to some issues that go beyond not having personnel in the IRS offices. He noted that the tax law changed after many people filed last January (one example: the elimination of taxes paid on the first $10,200 of unemployment benefits in 2020), which required extensive hands-on processing.
Note: For 2021, the year just ended, ALL unemployment benefits are taxable as ordinary income.
In addition to the retroactive change in taxation of unemployment benefits, the IRS had to cross-check the eligibility for stimulus payments. All that bogged the IRS down and delayed refunds to millions still waiting.
The good news is that if you filed by May 17 last year, you will receive 3% interest on the amount the IRS owes you. (If you filed later, perhaps because of an extension, the formula on interest is a bit more complicated.) But your eventual refund check (or direct deposit) will include interest.
Smith warns against filing an amended return if you haven’t yet received your refund. That will only slow the process exponentially.
The IRS will be sending out a letter in January, letting you know how much it sent you in stimulus payments last year. This is NOT taxable income but will remind you of what you received, and help you file for the stimulus or for more money, if deserved, when you file your 2021 return.
Child tax credit
The big change this past year in the amount of the credit and how it was distributed, will likely cause huge hassles. The credit was increased and paid monthly — in advance — starting for most people last July, with up to 6 months of the credit sent out.
In January, the IRS will mail a letter informing recipients of the child tax credit how much money they received, so they can file for the remainder of the credit by filing a 2021 tax return (even if they didn’t earn enough money to be required to file). I’m betting the IRS (or Congress) will come up with a simpler solution in the coming months, likely continuing the monthly credit payments.
Again, the child tax credit is not considered income for tax purposes.
Quarterly estimated payments
You need to make estimated payments if: (a.) you expect to owe at least $1,000 in income tax after withholding and refundable credits, or (b.) if you expect your withholding and refundable credits to be less than the 100% of the taxes you paid the prior year, or 90% of the taxes owed the current year. If you don’t make estimated payments, you could be in for a penalty. This is the time to carefully review your tax situation and make a quarterly estimated tax payment by this year’s January 18 deadline. Consult your tax adviser.
RMDs for 2022
All those who have reached age 72 will be required to take a required minimum distribution from traditional retirement accounts. The amount will be based on the value of your IRAs at the end of 2021 — a few days ago! Keep the year-end balances online or on statements you are receiving now.
Then immediately calculate your RMD, which must be taken by year-end 2022 — either in a lump sum before year end, or as an automatic monthly check to spread out the withdrawals. Be sure to have your custodian withhold income taxes.
Finally, this spring season is the time to finally file electronically and request direct deposit of refunds. Starting tax filing season now for 2021 — and planning for 2022 — can save a lot of tax hassles. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)