Part 1 of 2
By Bernard Freeman
The pandemic brought some major changes to income taxes. Chief among them is an Advance Child Tax Credit that will have consequences at tax time. Our Tax Guide for 2021 outlines some of the changes, as well as tax topics that are relevant every year, such as whether to hire a paid preparer, savvy ways to spend a refund and more.
Taxes and Unemployment
Unemployment payments are usually taxed as income by the federal government. That changed, however, in March 2021, when Congress passed the American Rescue Plan.
The law provided for people (including joint filers) making less than $150,000 to exclude $10,200 in unemployment benefits from their income when they file their income taxes for the 2020 tax year. Because the change was made in the middle of a tax filing season, the IRS pledged to recalculate the tax bills of most taxpayers who received unemployment benefits and send them refunds.
By late summer, however, many people were still waiting on their refunds. Other filers need to amend their tax returns on their own to get a refund. This applies to those who would qualify for additional deductions or credits not claimed on their original returns, according to Forbes.
How to Take Advantage
If you think you might qualify for a refund based on the new law, first check to see if the IRS is already processing your refund. You can do this by visiting IRS.gov and requesting a transcript of your tax returns. If the refund is not already in the works, speak to your tax preparer about filing an amended return to take advantage of the new tax benefits.
Anyone who receives unemployment payments receives a Form 1099-G, Certain Government Payments, at tax time. You may need to request the form from your state if you did not receive it. Box 1 of the form will show the total dollar amount of unemployment payments you received. You may deduct $10,200 from that amount when you file your tax return, if you qualify for the deduction. To do so, report the full amount on Line 7 of Schedule 1, then subtract the deduction on Line 8, according to Forbes.
Some tax filers during the pandemic have found that a criminal using their identity has received unemployment benefits using their name. If this happens to you, immediately contact the police and your state unemployment agency to report the fraud and request corrected forms. The IRS urges taxpayers not to report as income on their tax returns any fraudulent payments they did not receive.
Advance Child Tax Credit
The Child Tax Credit is typically a credit parents with dependent children receive on their income tax return.
In 2021, Congress passed the American Rescue Plan, which made a one-time increase in the credit for the 2021 tax year and provided for the IRS to pay half of the credit to taxpayers in equal monthly payments from July through December.
Children ages five and younger qualify for up to a $3,600 credit, while children ages six to 17 qualify for up to $3,000. The full credit is available to taxpayers who make less than $150,000 for married filing jointly or qualified widows or widowers; $112,500 for head of household, and $75,000 for single and married filing separate. The credit phases out by $50 for every $1,000 over those limits.
The new law made the credits fully refundable, so even those who don’t owe taxes can get the credit and receive a refund. Nearly 90% of children in the U.S. qualify for the advance payments, according to the IRS.
The payments could cause some confusion in 2022, because when taxpayers file their tax return for 2021, they will need to reconcile the advance payments with the actual credit they are entitled to, according to Kiplinger.
In addition, some upper-income families do not qualify for the increased credit, creating some confusion among taxpayers.
The payments are most likely to be problematic for certain taxpayers, according to H&R Block. The company recommends that those who received a small refund or had a balance due when they filed their 2020 tax return consider unenrolling from advance Child Tax Credit payments, updating their W-4s by entering an additional amount to be withheld each pay period on step 4c of the form, or making quarterly estimated tax payments for the remainder of 2021.
Visit IRS.gov to check if you’re enrolled for advance payments, unenroll from advance payments, update your bank account and mailing address or view your payments.
Why Hire a Professional?
Hiring a professional tax preparer to do your taxes can be a smart financial decision.
These professionals stay up to date on the newest tax laws and filing requirements, and you may find that being sure your taxes are done well is worth the cost.
According to the IRS, in 2020, about 167.6 million tax returns were filled. Approximately 72.2 million people prepared and e-filed the federal returns for themselves.
Here are some things to consider when deciding on hiring a professional.
Time. Filing your own taxes can be a time-intensive endeavor. If you own a small business, you could spend as much as 20 hours gathering receipts and other documentation and entering the information into an online platform. If you could use that time for something more important or valuable to you, choose a paid preparer.
Money. The National Society of Tax Professionals says the average fee for preparing Form 1040 is $203, and preparers who charge by the hour typically charge $138 per hour. What you get in exchange for the money you spend on your return is the next item on our list.
Peace of mind. When you pay someone to prepare your taxes, you are responsible for providing accurate information. Your preparer will do the work of checking for deductions, credits and other tax programs you might qualify for, as well as filing your taxes properly and timely. If you’re afraid you will second-guess the accuracy of your filing if you do it yourself, it might be worth the money to hire a pro. Some paid services even offer help if you’re audited or otherwise contacted by the IRS about your return.
Complexity. If you are a high earner, have multiple sources of income, investments, charitable contributions and other complicated tax situations, hiring a professional might be a good idea. Knowing the specifics of the tax law is critical in filing a complex return.
What to Look for
Business Insider suggests hiring a tax attorney, a certified public account or an IRS enrolled agent to prepare your returns.
Visit the National Association of Tax Professionals’ website at www.natptax.com to find a qualified preparer.
You can also visit the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications at irs.treasury.gov/rpo/rpo.jsf.
The IRS recommends making sure your preparer has a Preparer Tax Identification Number (PTIN) issued by the agency.
These are the only professionals who can represent you in front of the IRS if you are audited, or have issues with payments or collections.