In 2021, an IRS backlog resulted in delayed processing for millions of taxpayers beyond the typical 21-day processing time (for electronic filings). Experts recommend starting early in 2022, especially with the more complex filings resulting from stimulus payments and the advance Child Tax Credits.
Unlike 2021, the tax deadline has not been extended, so you'll need to submit your 2021 tax return or file for an extension by April 18, due to April 15 falling on a District of Columbia holiday. "The pandemic continues to create challenges, but the IRS reminds people there are important steps they can take to help ensure their tax return and refund don't face processing delays," said IRS Commissioner Chuck Rettig. "Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year. And we urge extra attention to those who received an Economic Impact Payment or an advance Child Tax Credit last year."
Items of note for 2021 filing:
- Economic Impact Payments are not counted as taxable income and will not increase your tax liability.
- If you received Child Tax Credit payments in 2021, those were an advance of a portion of the tax credit. They are not taxable income, but rather are a reduction in tax liability. The remainder of the credit will be applied when your tax return is filed.
Annual financial checklist
While you should rely on a tax professional for specific recommendations, tax time is also a logical time to run through your personal financial checklist, said Kimberly Bridges, director of financial planning at BOK Financial®.
"I use tax time as my annual reminder to review my financial situation to consider what's changed from last year," she said. "It keeps me accountable for any adjustments I want to make, like increasing my retirement and other savings—to coincide with a raise, perhaps—adjust withholdings and even updating beneficiary designations."
Bridges offered six areas for you to consider:
1. Tax withholding
"Maybe you realize you didn't get 2021 quite right and you are going to have to pay more than anticipated, so now is the time to fill out a new withholding form or increase estimates to get it adjusted for 2022," Bridges said.
2. Retirement contributions
If you are contributing to a 401(k), are you getting the full benefit of an employer match? "Check your contributions along with your allocations to ensure they still align with your goals," Bridges said.
If you have earned income, you can contribute up to $6,000 to a traditional IRA in 2021 (same as last year), and you can make that contribution up to April 15, 2022. You also may be able to contribute the same amount in your spouse's name if they don't have a retirement plan through their employer.
While Roth IRA contributions are never tax deductible, contributions to traditional IRAs may be deductible, dependent on factors such as income, tax filing status and access to an employer-sponsored plan. In addition, certain taxpayers may qualify for a "Saver's Credit" for making eligible contributions to a retirement plan.
3. Educational savings
Families contributing to a 529 plan may be able to reduce taxable income on their state income taxes. More than 30 states offer a deduction or credit for 529 plan contributions with a Dec. 31 deadline, but a few have an April deadline to benefit the previous year's taxes.
Oklahoma offers a generous state income tax deduction on 529 plans of up to $20,000 for a married couple filing jointly—and typically gives them until April 15 to make the contribution. "Make sure you know the rules for your state," cautions Bridges. "Some require use of the state's own 529 plan to receive the deduction."
4. Savings check
This is also a good time to check in on your budget. What are you spending money on? How have rising costs impacted your personal spending? What's the state of your emergency fund? Does it need replenishment?
"If clients didn't do so at the start of the year, I encourage them to take a good look at their spending and savings plan," Bridges said. "February and March are popular months for bonuses and raises to kick in, creating an ideal opportunity to increase your savings."
5. Medical expenses
If your company offers a high deductible health plan and a health savings account (HSA), are you fully funding that savings vehicle? Contributions to an HSA are tax-deductible and tax-deferred, and can be made up until April 15.
"If you have access to an HSA, it's a great savings tool," Bridges said. "Medical expenses can add up quickly and having that pool of funds available to cover insurance deductibles, co-payments and out-of-pocket expenses is a nice perk to a high deductible plan. Many clients also choose to save those funds for medical expenses in retirement, opting to pay current expenses with after-tax dollars in order to benefit from tax-free compound earnings in their HSA."
In addition, if you itemize your deductions and incurred medical or dental expenses last year, you may qualify for a deduction for expenses paid for you, your spouse or your dependents—but only if they exceed 7.5% of your adjusted gross income. To qualify, you must not have paid these expenses out of your HSA.
6. Financial gifts
Philanthropically minded individuals who donate to nonprofit organizations should be aware that the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended a standard deduction change for cash donations of $300 for individuals and $600 for joint filers who do not itemize. Contributions must have been made to a public charity by December 31, 2021.
In addition, individuals who contribute cash to a public charity and itemize deductions may deduct up to 100% of their adjusted gross income.
For those who have already reached retirement and are receiving required minimum distributions (RMD), you should note that qualified charitable distributions can satisfy the RMD requirement up to $100,000 during 2021 and 2022.
"Taking the route of a qualified charitable distribution can help accomplish your philanthropic goals while helping to keep your required minimum distribution from being included as income for tax purposes," said Ross McKinney, trust officer at BOK Financial.
In addition, if you plan to gift money to someone (as opposed to making a charitable donation) during the year ahead, note the increased $16,000 per person limit during 2022 to align with the annual limits and avoid the need to file a gift tax disclosure.
Gifts have both an annual exclusion and a lifetime exclusion. If you exceed the $16,000 level, you'll need to disclose the gift.
"The yearly ritual of meeting tax deadlines may not be a favorite annual occurrence, but your financial advisors and tax professionals are there to support you through the process in keeping it all straight," said Bridges.
Information in this article should not be construed as tax advice and is offered for general informational purposes only.