Yes, it’s that time of year again. Are you aware of all the changes?
The IRS is still working on last year’s tax returns and, like many employers, is short-staffed. You have until April 18 to file your taxes this year, but if you are looking for a quick refund, it’s best to file electronically as soon as possible. The IRS started accepting 2021 individual tax returns on Jan. 24.
Two big issues this year are the child tax credits and the economic stimulus payments.
Child tax credits were sent in up-front installments from July through December of 2021. The IRS is sending statements of how much you received. It is important to subtract the amount on your statement from the total amount of credits you claim. If the amounts do not match, it will slow down your refund.
Many taxpayers received a stimulus payment of $1,400 in 2021 based on their 2019 or 2020 return. As with the child tax credits, the IRS is sending letters that include the government’s record of stimulus payments sent to you.
Meanwhile, if you have not fully funded your 2021 IRA, you have until April 18 to do so. Keep in mind that the contribution limit is $6,000. There also is a catch-up provision of $1,000 if you are over 50. The income limits for joint filers are $198,000-$208,000, and $125,000-$140,000 for single and head of household filers in a traditional deductible plan. Depending on your tax bracket, contributing to your IRA can reduce your tax liability for 2021.
Make sure to check with your tax advisor to see how much you can save on your taxes because you may be able to use your refund to fund all or part of your IRA.
If you are over the income limits, all is not necessarily lost. You may be eligible for a back-door Roth conversion. This technique allows you to make a non-deductible contribution to an IRA account and then complete a Roth conversion of the funds. There are exceptions, however. If you currently have an open IRA account with a balance, part of the open IRA will be subject to tax on a Roth conversion.
If you made a cash donation of up to $300 per person last year, you will be able to deduct up to $300 in a charitable donation. For a joint filer, that number increases to $600. This is still the case if you take the standard deduction. Remember, this is a one-time deduction that has not been extended for 2022.
The current tax code will sunset in 2025. This will bring back the personal exemption and lower the standard deduction. It will also reduce the federal estate tax exemption and the gift tax exemption. Under current law, a person can gift a total of $12,060,000 over his or her lifetime and/or at death. That amount will revert to the $5 million exemption indexed for inflation after the current law expires.
Illinois does not currently have a gift tax exemption, but the estate tax exemption is $4 million and is not indexed for inflation. This is important information to remember when planning your estate. In 2021, a taxpayer could gift $15,000 per year to any number of people. The limit has been increased to $16,000 per year for 2022.
If your age tops 70 years, six months, you can make a qualified charitable distribution (QCD). Unfortunately, there is much confusion about QCDs because your required minimum distribution (RMD) does not start until the year you turn 72. You can do a QCD for up to $100,000 of your IRA, which will count towards your RMD for the year if you are age 72 or older.
To avoid tipping the government, you must keep an eye out for opportunities to save. Merely focusing on the year ahead isn’t enough. A better option is to put a long-term tax strategy in place that takes your goals into account. If you wish to leave a legacy or inheritance, make sure you know the rules about passing your assets onto the next generation and prepare accordingly.
Keep in mind that the tax code can change depending upon new legislation. You want to stay current with the changes and plan accordingly. Again, check with your tax advisor before rushing to file for that refund.