Note: The following is for informational purposes only and should not be considered tax advice. Please contact a tax adviser for questions about your personal tax situation.
With the holidays officially over, tax season will be here soon—whether you’re ready or not. Your 2021 federal tax return must be electronically filed or postmarked by April 18, 2022, unless you file for an automatic extension. If you’re feeling overwhelmed by tax season this year, don’t sweat it—we’ve got some tax tips to help you jump-start your taxes this year.
In This Piece:
- Check your information
- Get ready
- Understand your 2021 tax bracket
- Work with a professional or use tax software
- Consider the standard deduction
- Review eligible itemized deductions
- Take advantage of eligible credits
- Plan for potential tax refunds
- Watch out for scams
- File for free
- Consider maxing out pre-tax retirement
1. Check Your Information
Check your information with everyone sending you tax documents this year. If you’ve moved without putting in a change of address, you may miss important tax document delivery.
The IRS requires that W2s and other tax documents be postmarked by January 31, so you can expect to receive all your tax documents by mid- to late February at the latest. If you don’t receive something, follow up with the appropriate business or organization right away.
Some organizations that might need to send you tax documents include:
- Your current employer, as well as any employer that paid you W2 income this year.
- Businesses you completed contract work for during the year.
- Schools you made tuition or other payments to.
- Your mortgage lender or servicer.
- Your bank or other financial institutions that might have paid you interest.
2. Get Ready
Gather and organize your tax documents early. This ensures you’re ready to file as soon as possible—a benefit if you’re getting a refund. It also helps you find potential issues or have time to track down missing information.
Here’s a checklist of some things you might need to file your taxes:
- All W2s for the year.
- Any 1099s or other income forms, including those from contract work or investment income.
- Annual interest statement from your mortgage company—typically reported on a Form 1098.
- Full names, dates of birth and Social Security numbers for you, your spouse and any dependents.
- Routing and account numbers for a checking or savings account for direct deposit of a refund.
- Documents or receipts for charitable donations.
- Receipts for medical expenses.
- Receipts for educational expenses.
- Information about scholarships or other financial aid received during the year.
- Documents showing contributions to retirement accounts.
STOP! Did you check your information and gather all your documents? Do this right now! If you wait until April 14 to see if you have all the documents you need, you’re really going to regret not taking our advice now.
3. Understand Your Tax Bracket
Tax brackets change regularly to keep up with inflation. A tax bracket is the range of taxable income you fall into. Your taxable income is your adjusted gross income minus applicable tax deductions. You can review this year’s tax brackets and use tables to find out what bracket you fall into and how much that impacts what you owe.
While you’re considering your tax bracket, consider whether you have to file an income tax return. For example, if you’re a college-age adult and your parent is claiming you as a dependent, you only have to file a return if you meet certain income thresholds or you qualify for a refund and want to get it. Check with your parent to determine if they’re claiming you as a dependent, as that does change how you claim yourself when you file.
The IRS provides a tool to help you understand if you have to file a tax return.
4. Work With a Professional or Use Tax Software
Taxes can be complicated. Look for software that:
- Works with your filing needs, especially if you have home deductions or earn contract or self-employment income.
- Includes a wizard that walks you through entering data and understanding what deductions and credits you qualify for.
- Checks your return for errors before filing.
- Includes options for filing your state refund too.
- Lets you file electronically for the fastest potential refund.
5. Consider the Standard Deduction
Tax deductions work to decrease your taxable income. By bringing this number down, you may be able to fit into a lower tax bracket. That means you qualify for lower tax rates so you owe less in taxes.
The standard deduction is a preset dollar amount that’s subtracted from your AGI to help determine your taxable income. Your filing status—single, married filing together, married filing separately, head of household or widow(er) with a child—determines the amount you may deduct.
Standard Deductions for Tax Year 2019
Standard Deduction Amount
Married Filing Jointly
Married Filing Separately
Head of Household
Qualifying Widow(er) with a Dependent Child
Source: IRS Newsroom
6. Review Eligible Itemized Deductions
Itemizing deductions is another option you can choose. To benefit from itemizing, your personalized deductions should be more than your standard deduction. For example, if you’re married and filing jointly, you must have more than $25,100 in itemized deductions.
But if you pay a mortgage, have high medical bills and make charitable donations, itemizing may work for you. Here are some common eligible deductions you can write off on your 2021 taxes:
- Medical expenses
- Charitable donations
- Mortgage interest
- Mortgage insurance premiums
- State and local taxes
- Personal property taxes
A change for 2021 taxes due to the CARES Act allows you to deduct up to $300 in charitable donations without itemizing. It’s $600 for married couples filing jointly. This can help you reduce your total taxable income by a bit more than the standard deduction even if you don’t itemize.
Note that if you’re married filing separately, you and your spouse must both choose to either itemize your deductions or take the standard deduction. You can’t choose to do this differently.
7. Take Advantage of Available Credits
Tax credits are different from deductions. Deductions lower your taxable income; tax credits directly impact the tax amount you owe. They reduce the amount dollar for dollar.
For nonrefundable tax credits, you can only reduce your tax liability to zero. With refundable tax credits, you can receive a refund of the excess amount.
Tax Credit Example
Here’s a quick general example—you file Head of Household with an adjusted gross income of $55,000. You take the standard deduction of $18,800, which makes your taxable income $36,200. That puts you in the 12% bracket.
- The first $14,100 is taxed at 10%—$1,410.
- The remaining $22,100 is taxed at 12%—$2,652.
- Before applying any credits, you owe $4,062 in federal income tax.
- You have a seven-year-old child, which means you get a $3,000 child tax credit for the year.
- You received $1,500 of that credit in advance payments of $250 each from July through December 2021.
- $1,500 in tax credit remains to be applied.
- This credit lowers the tax amount you owe to $2,562.
Popular Tax Credits
Tax credits can lower the amount of tax you owe. But you must meet specific qualifications, including established AGI limits. Be sure to review the criteria for eligibility to learn whether you qualify for any of these popular tax credits:
- Saver’s Credit
- Residential Energy Efficient Property Credit
- Premium Tax Credit
- Health Coverage Tax Credit
- Lifetime Learning Credit
- Child Tax Credit
- Adoption Credit
- Earned Income Tax Credit
- Child and Dependent Care Credit
8. Plan for Potential Tax Refunds
Plan ahead to best manage any money you get from a tax refund. Set up direct deposit with the IRS to get your money faster and then use it to help support your future financial goals.
9. Watch Out for Scams
As tax time approaches, be on the lookout for tax scams. Some common tax scams include:
- Someone filing as you before you do. If you’re slow to the punch, someone might steal your identity by filing a return in your name and pocketing a fraudulent refund. Reduce this risk by filing as early as possible.
- Tax settlement scams. If you owe money to the IRS, scammers may target you with too-good-to-be-true settlement offers. Know that the IRS doesn’t call or email you with a settlement offer and demand payment by wire transfer, gift cards or other odd means.
- IRS impersonation scams. In this scam, criminals call and pretend to be from the IRS. They say you owe taxes or have a problem with your taxes and use pressure tactics to get you to pay right away. If you legitimately owe money to the IRS, it will always send you a certified letter in the mail and not simply call you.
- Someone used your Social Security number for employment. In this case, you may get a CP10E notice, and it’s important to respond and report the issue quickly.
10. File for Free
Some individuals may be able to file taxes for free through the IRS, though income limitations and other qualifications apply. Even if you don’t meet those requirements, there are other ways to file your taxes for free.
11. Consider Maxing Out Pre-Tax Retirement Contributions
You can contribute up to a certain amount to qualifying retirement plans before paying taxes. This effectively reduces your taxable income for the year. Here are some of the contribution limits for 2021:
In a Nutshell:
A lot of work goes into preparing and filing your taxes. But getting organized early and having a plan can help you maximize your tax return refund.
It also helps you develop a plan to pay any taxes owed so you don’t fall into a financial trap. Wondering if taxes affect your credit score? Not directly, but they can create a situation that does! Stay on top of your credit with ExtraCredit® throughout the year so you know if anything is impacting your score.
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