Before You File, and After

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Before You File, and After

BY » Peter Eisenhauer

If you haven’t filed your 2021 tax return yet, here are a few things to remember before you get started. Taking the steps to file a complete and accurate 2021 tax return will ensure that you get your full tax refund if the IRS owes you, or help you avoid further expense and trouble if it turns out you still owe some tax. After you are done, particularly if you work with a professional, the information from your tax return might provide some data points and motivation to make adjustments that help you reach your financial goals.

One thing you definitely want to avoid this year is filing on paper if you are owed a refund. The current IRS backlog in processing those returns will guarantee you a very long wait for your money. The better options are to file electronically through tax preparation software, Free File on IRS.gov, or a professional tax preparer. Be sure to set up direct deposit also. The IRS says that for people with no issues with the tax return, most taxpayers will receive their refund within 21 days, if they file electronically and choose direct deposit.

To prepare your tax return you will need the documentation showing all your sources of income, all your deductions, and credits. That means W-2s, 1099s, receipts, canceled checks, etc. You will want to compile all year-end income documents, such as Form 1099-MISC, Miscellaneous Income; Form 1099-INT, Interest Income; Form 1099-NEC, Nonemployee Compensation; Form 1099-G, Certain Government Payments, like unemployment compensation or state tax refund; and Form 1095-A, Health Insurance Marketplace Statements. You might also need IRS Letter 6475, that provides the total amount of the third Economic Impact Payments, and IRS Letter 6419, if you received advance Child Tax Credit payments in 2021.

The IRS advises that you wait to be sure you have all 2021 tax information before filing. Gaps or discrepancies between the information you put on the return and what the IRS has already received from your employer and others could lead to a processing delay and possibly trigger an audit.

An extensive list and links to detailed information is available on the IRS website, www.irs.gov. Just search for Publication 5348 on the site for steps you can take to prepare to file a 2021 tax return. This includes information about viewing or creating an Online Account; it’s now easier for more taxpayers to use the new Secure Access Digital Identity (SADI) process to verify their information. The page also explains how to make sure there’s been enough tax withheld, and how to set up a bank account for direct deposit of tax refunds.

This year in particular, the IRS and many experts emphasize that you might want to file a 2021 tax return, even if you aren’t required to file. If you qualify for certain tax credits or already paid some federal income tax by having taxes withheld from a paycheck you may qualify for a tax refund. But you won’t get that refund unless you file a return.

This includes individuals who didn’t qualify for the third Economic Impact Payment or did not receive the full amount, who may be eligible for the Recovery Rebate Credit based on their 2021 tax situation. If you are eligible, you will need to file a 2021 tax return, even if you don’t usually file, to claim the Recovery Rebate Credit. To do that, you need the total amount of your third Economic Impact Payment, including any supplemental or “plusup” payments, to file your return accurately and avoid a processing delay that may delay your refund. That information will be available to taxpayers from Letter 6475, which the IRS has been sending out, or by logging in to their IRS Online Account.

Another area that could be confusing because of the special circumstances over the last two years is unemployment compensation. Millions of Americans received unemployment compensation last year, and it’s fully taxable in 2021. That’s a change from last year, when The American Rescue Plan Act of 2021 allowed an exclusion of unemployment compensation of up to $10,200 for 2020 only. Looking forward for 2022, if you receive unemployment payments and federal taxes are not being withheld, you may need to make estimated tax payments during the year.

The IRS reports that there were millions more errors on 2020 tax returns than in previous years, including those requiring special handling by an IRS employee, to correct the Recovery Rebate Credit amount. That’s why it says it is so important to have the total amount of the tax year 2021 third Economic Impact Payments, and advance payments of the Child Tax Credit, in addition to normal income documents.

The IRS has special advice if you are among the many whose tax return from 2020 is still being processed. When filing your tax return electronically you need to provide the Adjusted Gross Income, or AGI, from your most recent tax return. But if you are still waiting for your 2020 tax return to be processed, the system does not recognize the AGI from the return. In that situation, the correct number to enter for last year’s AGI on your 2021 tax return is $0 (zero dollars).

So, sometime between now and April 18, after you have filed your return, it’s a good time to compare your results with previous years. In its quarterly 1040 News Mooresville Tax Service provides a helpful guide to questions you might ask yourself or a professional advisor. These include: • what life changes do you anticipate in the next year that might impact your tax situation? • should you adjust your retirement contributions to pre-tax (eg. 401k) or post-tax (eg Roth 401k) plans. The question here is do you want the tax savings now or in the future? • would an HSA (Health Savings Account) work for you? • should you adjust your nonsheltered investments?

Derek Bostian, of Two Waters Wealth Management, in Huntersville, says that “when it comes to investing, it’s not how much you earn that matters. It’s how much you keep.”