Tax Day – for many, possibly one of the most loathed entries on the annual calendar – usually falls on or shortly after April 15 and is the day by which your federal tax return must be submitted. In 2022, April 18 marks the deadline for filing your 2021 tax season return.
If the idea of a pending deadline has you breaking out in a cold sweat, have no fear – you don’t have to wait until the very last minute to get your tax affairs in order. Instead, why not get a jump on this tax season by preparing in advance for an early submission?
Preparing for tax season does not have to be a mountain, just break the process down into manageable miles. Here’s a run-through of some steps to take:
Go It Alone? Or Seek Out a Professional?
For individuals who earned $73,000 or less in 2021, it is possible to file for free making use of the Internal Revenue Service (IRS) Free File program. This initiative enables users to select the income tax form needed, enter information online, electronically sign and file the return, and print out a copy for your file. About 4.2 million Americans used the Free File program for their 2019 taxes, according to the IRS.
What the system doesn’t do is undertake extensive error checking or offer any guidance about forms to use or how best to deal with tax problems. For that, it’s best to turn to a professional.
If you don’t already have an expert in your corner, the first step is to ask friends, colleagues and family members for a reference. Make sure that whoever you use to help you prepare, calculate and file your income tax return is registered with the federal government and has a preparer tax identification number (PTIN). A PTIN must be renewed each calendar year and gives the holder the right to charge for these services.
The largest number of PTIN-accredited professionals are Certified Public Accountants, but you can also make use of an attorney, an enrolled agent, enrolled actuary or enrolled retirement plan agent. A directory of PTIN-accredited professionals is available online. Obviously, individuals filing their own tax returns – or doing so for friends and family without charge – do not have to obtain a PTIN.
Despite not being licensed to give tax advice, your financial advisor should have an idea of your tax situation in order to give informed investment and strategic wealth advice.
What Documents Do You Need?
Irrespective of whether you approach tax season with DIY know-how or with the help of an expert, the documents you need to submit are the same. You should automatically receive the various tax documents you need by the end of January. You’ll receive these from your employer/s, banks and brokerage firms, but it’s still advisable to check the accuracy of the documents against your own records.
Each tax return is unique, but some of the documents you might need to show your income include:
- Form W-2 – if you are employed.
- Forms 1099-K, 1099-MISC – if you are self-employed.
- Form 1040-ES – to record rental income.
- A variety of 1099 forms relating to dividend income, pension income, compensation paid to independent contractors, savings and investments or dividends paid.
- Form 1098 – relating to mortgage interest paid.
- Form W-2G – for winnings from gambling, or income earned from royalties, hobby income or state tax refunds.
You’ll also need to gather receipts such as those for medical costs that weren’t covered by a health plan, as well as proof of property tax payments and investment-related expenses, plus any charitable donations.
A great tip is to dig out your return from the previous year to double check that all necessary documents have been received so you don’t overlook anything in this tax season’s submission.
Tax Season 2021: Saving Contributions Limits
For top-income earners, the income tax rate for 2021 is 37%, with some exceptions based on tax brackets and individual tax rates. It is always advisable to consider how your filing status impacts these brackets, deductions and contribution limits.
For instance, the standard deduction amount – which reduces the income on which you are taxed – looks like this for the 2021 tax season:
- $12,500 for individuals and married couples filing separately
- $18,800 for heads of household
- $25,100 for married couples filing together and for surviving spouses
Capital Gains Tax remains unchanged with most people subject to a maximum 15% rate, but the amount can vary based on tax brackets and filing status. This is the same for medical and dental deductions, state and local sales, income and property tax, as well as for building, buying or improving your home.
Notably, the limit for charitable cash donations as a percentage of adjusted gross income (gross income less deductions) was increased to 100% (from a usual cap of 60% when giving to public charities) for 2020 and 2021. For those who have been offering a helping hand to others during the coronavirus outbreak, this could be an important deduction to consider.
Looking to Tax Season 2022
Looking towards the 2022 tax season, it’s important to bear in mind that some rules, tax breaks and contribution limits have changed. These will impact the 2022 tax return you’ll file in 2023, but you should already be factoring into your tax planning. These include:
- 401(k) Employee Contribution Limits: Increased to $20,500 from $19,500 for 2022.
- Medical Deductions: If you have self-only coverage in a high-deductible health plan, you can contribute up to $3,650 into the account in 2022. Those with family coverage can save up to $7,300.
A Good Reason to File Early
Finally, another reason for filing your tax return early is that you can expect your income tax refund sooner.
Generally, most Americans can expect to receive their tax refund via direct deposit in about two weeks, but the process can be delayed if you file late or if you are claiming certain credits – such as Child Tax Credit (a tax benefit per eligible children under age 18) or Earned Income Tax Credit (a subsidy for low-income families). The process is also sped up if you e-file rather than relying on the mail.
If, for whatever reason, you can’t file on time and don’t have the necessary documentation in hand come April 18, then it is possible to ask for an extension by completing a 4868 form.
If that all sounds like a lot to take in, then just keep your eye on the prize. If you have managed your finances carefully and mindfully, then you will likely qualify for a tax refund. Yes, the money was effectively a tax-free loan to the government, but it can make for a tidy sum to put towards your retirement nest egg or emergency account.
If you haven’t been forward-thinking in how you manage your finances, no need to worry. Contact us today to inject some strategic thinking into your approach to tax.