Feeling frustrated this tax season? You're not the only one.
For a number of taxpayers, the process of submitting federal tax returns this spring may feel more complicated than it did in previous years. That’s, in part, due to the COVID-19 pandemic, its impact on Americans’ earnings and how the Internal Revenue Service (IRS) is answering federal lawmakers’ requests to adjust certain tax laws since the outbreak.
To help you avoid confusion, below, we jotted down some considerations that, unlike previous years, could impact how you go about filing your 2021 return before the April 18 deadline. They touch on everything from cryptocurrency to payments some parents started receiving last summer to offset the costs of kids during the pandemic.
Higher Standard Deductions and Tax Brackets
Every year, tax filers have the option of taking the standard deduction or itemizing deductions (which requires listing each write-off individually and is only worth the time if their total is above the standard deduction) to reduce the amount of income that the federal government taxes. In 2021, the IRS increased those deductions by $150 and $300 from the previous year for single taxpayers and joint filers, respectively.
Also, the IRS made slight changes to the seven federal income tax brackets to account for inflation, with the lowest grouping at 10% and the highest at 37%. The table below displays the brackets, as described by the IRS.
| 2021 Marginal Tax Rates | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0-9,950 | $0–19,900 | $0–14,200 | $0–9,950 |
| 12% | $9,951–40,525 | $19,901–81,050 | $14,201–54,200 | $9,951–40,525 |
| 22% | $40,526–86,375 | $81,051–172,750 | $54,201–86,350 | $40,526–86,375 |
| 24% | $86,376–164,925 | $172,751–329,850 | $86,351–164,900 | $86,376–164,925 |
| 32% | $164,926–209,425 | $329,851–418,850 | $164,901–209,400 | $164,926–209,425 |
| 35% | $209,426–523,600 | $418,851–628,300 | $209,401–523,600 | $209,426–314,150 |
| 37% | Over $523,600 | Over $628,300 | Over $523,600 | Over $314,150 |
Expanded Child Tax Credits, Health Insurance Premiums
While deductions help lower the amount of your income that can be taxed, tax credits are dollar amounts that you can subtract from your tax bill, as explained by Ramsey Solutions.
Federal lawmakers made adjustments to several tax credits in 2021. Under the American Rescue Plan — a multi-faceted, $1.9 trillion COVID relief package that took effect in March 2021 — the caregivers of children under the age of 6 were eligible to receive $3,600 per child, and eligible to recieve $3,000 for every older child younger than 18, if they met certain income requirements. Those amounts were higher than that of the country's previous Child Tax Credit.
And, for the first time, some eligible families received a portion of that money via advanced monthly payments to offset COVID-related expenses. If you didn't opt out of that option, Business Insider and H&R Block encourages you to find your Letter 6419, which the IRS should have mailed you in January, and accurately report your advanced payment on your 2021 return. That way, according to both sources, you'll be able to claim the remainder of your Child Tax Credit. Other recipients — families that didn't receive payments ahead of time — should make that clear on their returns, as well.
However, families that received advanced payments and ended up earning more money than they expected by the end of 2021 (pushing them above the program's maximum income), or families that erroneously received more financial relief from the federal government than they were supposed to, may need to pay some money back after filing their returns.
"The challenge is the forms are not matching up exactly with what people have received," Jamie Hopkins, managing partner of wealth solutions at Carson Group, told Business Insider. "I have been advising people to make sure what you actually received agrees with the IRS Letter 6419."
Similarly, the same federal package increased another tax credit, called the Premium Tax Credit, for 2021 and 2022 to make health insurance premiums more affordable for people who use the federal or a state marketplace, according to H&R Block. As a result, some filers may have to pay back some money if their earnings exceeded certain thresholds and/or pending how they used the marketplace, CNBC reported.
Lastly, the IRS is treating stimulus checks that eligible Americans received in early 2021 (up to $1,400 for individuals and an additional $1,400 for dependents) as refundable tax credits — not taxable income — that will not change what you owe or what you get back, according to Ramsey Solutions. Nonetheless, note the money you received via your stimulus payment on your return.
CNN Business warned:
"The last thing you want is for there to be a discrepancy between the IRS records and what's on your return. That will cause delays in processing your return and issuing your refund.
And you'll want to use that number to work out whether the IRS actually owes you more by way of a recovery rebate credit, once you calculate how much more of the stimulus payment you're due on the basis of your actual 2021 income. Taxpayers who earned less in 2021 than 2020 may be eligible for more money. The same goes for anyone who had a child last year. And for very low-income taxpayers who didn't receive any payment, filing a return now is your chance to claim it."
New Option to Claim Charitable Deductions
COVID-era law changes that aim to incentivize charitable donations could help you this tax season. While filing 2021 returns, individual tax filers can claim tax breaks for cash donations up to $300, while married couples may get up to $600, even if they don't have any other write-offs to itemize.
Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina, told CNBC that most Americans don't have enough itemized write-offs to exceed the standard deduction — making it difficult for them in the past to claim the charitable deduction — so the COVID-era change could offer a "nice tax break."
Unemployment Benefits are Taxable Again
In light of the pandemic, the American Rescue Plan also granted taxpayers the temporary opportunity to waive up to $10,200 of unemployment compensation on their 2020 tax returns.
But that benefit was no longer in effect. Households that didn't withhold federal tax from unemployment compensation in 2021 (or didn't withhold enough) may owe the federal government some cash, as reported by CNBC and Business Insider.
A Cryptocurrency Crack Down
In 2021, U.S. President Joe Biden's administration enacted new reporting requirements for cryptocurrency.
Form 1040 asks the following question: "At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?" In other words, mark "yes" if you sold or traded Bitcoin or any other cryptocurrency, used it to buy something, or someone paid you with it at any point in 2021. On the other hand, if you simply bought or held cryptocurrency during the year, you don't have to report that information, according to CNN Business.
For years, the IRS has taxed virtual currencies as property, or as an investment, when taxpayers sell or use the currency to purchase anything, according to the agency's website.
"The rules around cryptocurrency have not changed," Hopkins told Business Insider. "The amount of data the IRS has and the urgency of which they are going to enforce the taxation of cryptocurrency has changed. The IRS will start enforcing tracking and start hunting down lost tax revenue due to crypto transactions."
For most taxpayers, the filing date is April 18.
File for an automatic extension using Form 4868, however, and you will have until Oct. 15 to prepare and submit your return to the IRS. Still, no matter that extra time, if you owe the government money in 2021 income taxes, you need to estimate that total as soon as possible, Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants, told The New York Times. By not taking that step (you can estimate what you owe by looking at last year's return or using a DIY tax software), you could face penalties, he said. You should file and pay what you can, he said, and then contact the IRS to discuss an installment plan to pay any balance after the agency processes your return.
On the flip side, if you paid more than you should have in taxes in 2021 and the government now owes you a refund, the IRS says it will send you that money or deposit it directly into your bank account within 21 days of receiving your return, so long as you filed electronically. (Expect more time if you mailed in a paper return, according to the agency.) If that's you, here's a tool to check your refund's status.
Need help finding a tax preparer? We recommend starting with the IRS' website, which includes a directory of credentialed preparers that you can search by ZIP code. And for people with tight budgets and limited time, the agency operates its own portal for filers to electronically prepare and file individual federal income tax returns — for free. Here’s how to take advantage of that service.
Sources
CFP®, Kate Dore. ‘Here Are Must-Know Changes for the 2021 Tax Season’. CNBC, 1 Dec. 2021, https://www.cnbc.com/2021/12/01/here-are-must-know-changes-for-the-2021-tax-season.html.
CPA, Sharon Chin, Sheneya Wilson. ‘9 Tax Changes to Know before Filing Your 2021 Federal Return’. Business Insider, https://www.businessinsider.com/personal-finance/tax-changes-for-2021. Accessed 11 Apr. 2022.
Tax, TurboTax-Taxes, Income. Taxes 2021: 7 Upcoming Tax Law Changes. https://turbotax.intuit.com/tax-tips/general/taxes-2021-7-upcoming-tax-law-changes/L3xFucBvV. Accessed 11 Apr. 2022.
‘2021 Taxes and New Tax Laws’. H&R Block, 29 Dec. 2021, https://www.hrblock.com/tax-center/filing/tax-law-changes/.
‘Tax Season 2022: What You Need to Know’. Ramsey Solutions, https://www.ramseysolutions.com/taxes/tax-season-what-you-need-to-know. Accessed 11 Apr. 2022.
‘2021 Tax Returns: What’s New on the 1040 Form This Year’. Kiplinger, https://www.kiplinger.com/taxes/tax-filing/604100/2021-tax-returns-what-is-new-on-1040-form. Accessed 11 Apr. 2022.
‘Standard Deduction 2021-2022: How Much It Is’. NerdWallet, https://www.nerdwallet.com/article/taxes/standard-deduction. Accessed 12 Apr. 2022.
Bloomberg - Are You a Robot? https://www.bloomberg.com/tosv2.html?vid=&uuid=c7f001bc-ba94-11ec-975f-67725a426174&url=L25ld3MvYXJ0aWNsZXMvMjAyMS0xMS0xNy9ob3ctdGF4aW5nLWNyeXB0by1nb3QtY2hhbmdlZC1ieS1pbmZyYXN0cnVjdHVyZS1sYXctcXVpY2t0YWtl. Accessed 12 Apr. 2022.