With tax season now beginning, experts are urging taxpayers to expect more delays and hassles this year, emphasizing the need to file early and carefully prepare your information, if necessary, with the help of a CPA or other licensed tax professional or through free tax filing services.
On Jan. 24, the Internal Revenue Service (IRS) began taking 2021 tax returns, more than two weeks ahead of last year’s filing deadline. The deadline for most taxpayers is April 18, but the IRS faces a long road ahead. At the same time as significant personnel shortages and a backlog of unprocessed paper returns running into the millions, coronavirus stimulus checks and scaled-up child tax credit payments are adding to IRS officials’ workload.
Here’s everything you need to know about filing your taxes, preparing your return, and receiving your refund as soon as possible.
How long should I keep tax documents?
If you’re thinking about moving or just trying to tidy up around the house, you might be ready to toss or shred your old tax documents. But should you? Will you ever need them again? My tax clients often ask if this is a good idea, so I’ll tell you what I tell them.
First of all, the IRS can audit you for up to three years after you file, so if you have tax documents from the last three tax years, you’ll need to keep those. If you run a business and have employment tax records, keep those around for four years. I should also note that if you’ve grossly underreported your income or filed using fraudulent information, there is no time limit on how long the IRS has to audit you.
Sorry if that’s not the answer you wanted! However, if you don’t have a great filing system or if you’re sick of all of the paper clutter, consider digitizing your documents instead of throwing them out. The only caveat here is to make sure you’re using a secure system and that you have a digital backup of all of your files.
You might also be wondering which documents you need to keep. For at least three years, don’t shred these:
- All receipts related to tax credits or deductions you claimed, such as charitable contribution receipts, student loan bills, and childcare bills.
- All bills related to medical expenses, including prescription receipts, bills for weight-loss programs, and bills from any medical professional or hospital.
- All IRS forms such as Form 1040s, Form 1099s, and Form W2s.
- If you have your own business, you’ll want to keep mileage logs, sales tax receipts, and receipts for all office expenses. You’ll also keep invoices and payroll records. If you have a home office, keep utility bills as well.
Another important piece of advice I have is to make sure you are shredding documents you no longer need rather than just tossing them in the trash. Finally, if you’re not sure what to do with some of your tax documents, ask a CPA.
Amy Northard from Accountant for Creatives®
When are taxes due?
S Corporation: Return or Extension Requests Due By March 15, 2022 – File Using Form 7004
- Final Due Date (w/ Successful Extension): September 15, 2022
Partnership: Return or Extension Requests Due By March 15, 2022 – File Using Form 7004
- Final Due Date (w/ Successful Extension): September 15, 2022
C-Corporation: Return or Extension Requests Due By April 18, 2022 – File Using Form 7004
- Final Due Date (w/ Successful Extension): October 17, 2022
Personal Returns (Including Schedule C Businesses): Return or Extension Requests Due By April 18, 2022 – File Using Form 4868
- Final Due Date (w/ Successful Extension): October 17, 2022
Mike Jesowshek from Tax Savings Podcast
What is a taxable benefit?
To start, it’s important to understand what exactly a benefit is. According to the Canada Revenue Agency (CRA), a benefit is defined as paying for or providing an employee (or their spouse, child, or sibling) with something personal in the form of an allowance, a reimbursement, or the free use of property, goods, or services owned by the employer. Breaking things down further:
- An allowance (or advance) is a periodic or lump-sum amount an employee is paid on top of their wages to cover the cost of anticipated expenses. For example, a daily meal allowance to cover the cost of food during a business trip.
- A reimbursement is an amount paid to an employee to repay expenses incurred while carrying out their day-to-day work. For example, if an employee took a client out to lunch, they would provide receipts for the expense and receive a reimbursement.
Whether a benefit is an allowance, a reimbursement, or the free use of the employer’s property, goods, or services, employers must consider the following:
1. Determine if the benefit is taxable.
2. Calculate the value of the benefit.
3. Calculate the payroll deductions.
4. If applicable, file an information return.
What do tax regulations tend to be?
Tax regulations tend to be complex and ever-evolving. It’s important that controllers and others stay in the know about any additional proposed changes that can impact their company’s liability in the 2022 tax year and make adjustments to prepare for future years. This preparation may require a shift in corporate strategy, and the data you provide your company can keep business running smoothly regardless of regulatory changes.
Check out our 2022 Tax Changes article to discover the most significant tax changes of 2022 (tax rate increase for C Corporations, changes for large and multinational corporations, clean energy tax credits, expiring tax incentives, childcare tax credit, long term gains, and qualified dividends) and provide some insight into what they mean for corporate financial employees.
Neil Brown from Controllers Council
Who needs to file a tax return in the United States?
The famous answer – it depends. The tax return provides the Internal Revenue Service (IRS) information about how much and the type of income you earned during the previous year. It’s also the driver for tax credits and deductions which reduce your overall tax bill.
Every taxpayer is entitled to the annual standard deduction- a block of income which is not taxable to you- generally speaking- if your Gross Income (Total of Wages, Interest and Dividend Income, and Small Business Income) is less than the Standard Deduction, you are not REQUIRED to file an IRS Form 1040. However, depending on your state of residence, or the State in which you earned income, the answer may be different. Typically, if your “Adjusted Gross Income” is less than the Standard Deduction, you owe on Federal Income Tax. However, if your employer withheld federal tax from your earnings, you will need to file to get those taxes withheld refunded to you.
In addition, you may wish to file even if you owe no taxes to become eligible to claim refundable tax credits such as the Earned Income Credit (EITC) or child tax credit (CTC). These cannot be claimed if you do not file a tax return. For example, when the Covid Pandemic hit, the Government issues Stimulus Payments to taxpayers. However, if you had not filed in the past 2 or 3 years, no Stimulus payment was issued. So, filing a return, even if it is not necessary, is just a good idea, in the long run. There are very specific rules to filers that collect unemployment, were self-employed (must file $400 and over), and are not limited to advance payments on the premium tax credits. If no tax returns have been filed in the past 2 or 3 years, you may not be eligible for some assistance payments.
So, what is the “Standard Deduction?” The amount of the Standard Deduction is based on your filing status (For the 2021 tax year, the amounts are $12,550 for single filers, $18,800 for the head of households, $25,100 for married joint filers, and $12,550 each for Married Filing Separately). For the 2021 tax year, the standard deduction is $1,350 higher for those who are over 65 or blind; it’s $1,700 higher if also unmarried and not a surviving spouse.
If you are a US citizen or resident alien you must file a tax return if you earned more than the standard deduction. Even if you lived outside of the U.S. during the tax year, you are required to file a return if your Adjusted Gross Income is in excess of your specific Standard Deduction.
Dependents of taxpayers have all sorts of filing requirements so be careful of your friends advice-they must file a return depending on how their income gets “triggered” The starting
point is whether the income is earned (wages) or unearned (interest and dividends) Unmarried dependents must file a tax return if their unearned income exceeds $1,100 or if their earned income is above $12,550.
Note there are specific rules for college-age students and you may be able to use Form 8814 to report your child’s interest and dividend income on their parent’s tax returns. We advise seeking the assistance of a CPA or other licensed tax professional.
Remember, there are many reasons to file a tax return when you are below the filing requirements- you have many credits that are available including earned income, child tax credits, American opportunity tax credits, and most recently the Recovery rebate credits
Reminder to those who have received advance child credits- you will get a notice from the IRS on Form 6419 and you will need this form to finalize your 2021 tax returns Remember, these payments were advances, not stimulus. The Stimulus Payments are confirmed through letter 6475. Both of these letters are necessary when filing your 2021 IRS form 1040.
When in doubt, seek the advice of a trained and licensed professional. Be sure the tax preparer is licensed by your state, has an IRS Issued Preparer Tax Identification Number or PTIN.
A PTIN is a number issued by the IRS to paid tax return preparers. It is used as the tax return preparer’s identification number and, when applicable, must be placed in the Paid Preparer section of a tax return that the tax return preparer prepared for compensation.
Be aware if a paid preparer asks you to sign a return without their PTIN and personal information completed on the tax form. Many unscrupulous tax preparers will bypass this and put “Self-Prepared” on the return. This leaves you on the hook for any penalties and interest resulting from a poorly or fraudulently prepared return. Remember, you get what you pay for.
Rob Tamburri from Balog + Tamburri, CPAs
What is the minimum income level required to file taxes?
Like any other question related to taxes, this question has many caveats and conditions that depend on your specific situation. For example, even if you had no income in 2021, you may still need to file taxes to report particular factors to the IRS. If you are in a hurry to find out whether you still need to file in 2022, you can use the IRS’ Interactive Tax Assistant. This online questionnaire takes 10-15 minutes to complete and walks you through a series of questions that help you figure out whether you need to file a federal income tax return. Before starting the questionnaire, you’ll need to know your filing status, the amount of income tax withheld, and your 2021 gross income.
Many taxpayers become confused when learning that they’ll need to file a tax return, despite receiving little or no income in 2021. Well, the main reason you’d file in this scenario would be to report advanced tax credits, unearned income, or to pay tax on the income you did receive in 2021. Here are several circumstances that would require you to file a tax return:
- You received unemployment income (more on this below)
- You had taxes withheld from your pension or wages for the 2021 tax year and would like a refund.
- You have unreported tip income with owed Social Security and Medicare taxes.
- You received an advanced Premium Tax Credit payment during 2021.
- You received a stimulus payment as part of the American Rescue Plan.
When it comes to unemployment benefits, it’s worth noting a few changes that impact how you’ll file in 2022.
Now, if you received unemployment benefits in 2020, you may have received benefits in January 2021. If so, you’ll need to include this income on your 2021 tax return, even though you actually received this money for a 2020 period. If you collected unemployment in 2021, you will receive a Form 1099-G from either the state or your unemployment benefits payor. The Form 1099-G is for informational purposes and does not need to be filed with your 2021 tax return.
Cassidy Jakovickas from MBS Accountancy
What are some tax myths for 2021 returns that you’re seeing a lot, and this is a major one specific to 2021-2022 dealing due to COVID-19?
Many people took advantage of the CARES Act provision in 2020 that allowed for a tax-free distribution from an IRA account of up to $100,000 if they were affected by COVID-19. There are three common myths or misconceptions relevant to 2021 tax returns related to these Covid related IRA distributions (CRDs):
1. That the distribution was completely “tax-free”. It can be, but it requires a contribution by 2023, and then filing amended tax returns.
2. That the proper reporting of the distribution was all taken care of with their 2020 return.
3. That the distribution doesn’t need to be contributed to the IRA.
So for myth #1, the provision only made the distribution penalty-free, not immediately tax-free; the distribution itself was treated as ordinary income. But, it did allow for the $100,000 to be spread over a 3-year period from 2020, 2021, and 2022.
That brings us to myth #2, that the transaction was only part of their 2020 return. The standard way these were set up was to recognize the income over the 3-year period, which is called the “three-year ratable income inclusion method”. This would add $33,333.33 of taxable income in each year for 2020, 2021, and 2022. So even if the taxpayer took out the $100,000 and then filed their 2020 taxes, they might not realize they have an additional $33,333.33 to report on their 2021 return (and again in 2022).
Moving onto myth #3, many taxpayers don’t realize the distribution needs to be contributed to the IRA by 2023, and then they need to file amended returns for the distribution to become tax-free.
So in the previous example, if the taxpayer took the $100,000 distribution and reported the income over 3 years, the taxpayer still needs to re-contribute the $100,000 by 2023, and then they would file amended returns for 2020, 2021, and 2022, and would then deduct the contribution amount from their taxable income in the year of contribution.
The alternate way it could have been done is if the taxpayer reported all $100,000 on their 2020 return, and then if they recontribute the money by 2023, they would then file an amended return for just 2020 and deduct the contribution from their taxable income in the year of contribution.
So for 2021, if a taxpayer contributed a 2020 CRD, then they would deduct the contribution from their taxable income on their 2021 return. If they don’t have the funds to recontribute, they need to be aware of reporting 1/3 of the distribution in their taxable income if they used the 3-year ratable income inclusion for the distribution.
The fact that these transactions need to be dealt with over a 3-year period is what causes these misconceptions because most taxpayers are used to tax issues that only affect one year at a time.
Nate Hansen from SuperfastCPA
When will tax reform affect my taxes?
Tax law is changing every year, we may not hear about it, but it’s constantly evolving. The last significant tax reform was the Tax Cuts and Jobs Act when President Trump was in office back in 2017. This provision impacted many different aspects of taxation, but two changes were felt the most by Taxpayers.
1. QBI – This new provision, also known as Section 199A, allows a deduction of up to 20% of qualified business income for owners of some businesses.
2. Standard deduction increase – The Tax Cuts and Jobs Act (TCJA) increased the standard deduction from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint returns, and from $9,550 to $18,000 for heads of household.
President Biden has also changed up Tax law during his presidency. One of the changes causing the most stress this tax season is the Advanced Child Tax Credit (ACTC). The ACTC gave some taxpayers with children an “advance” of their tax refund. This means some taxpayers are getting a smaller refund than they’re used to because they already received some of it throughout 2021.
Crypto investors listen up; the IRS is getting stricter. The Infrastructure bill that President Biden signed into law induces updated Crypto regulation. Beginning with the 2023 tax year, Cryptocurrency exchanges will be required to collect taxpayer identifying information from their customers to properly issue Forms 1099 at the end of each tax year. Previously cryptocurrency exchanges did not need to collect and report that information.
Tax law is constantly changing every year; the best way to stay on top of the updates and have a stress-free tax season is to go to a trained credentialed tax prepare.
Alberto Contreras from Latino Tax Pro
How can a mileage log help during tax season?
A mileage log is quite useful for tax season as it serves as a documented record of the distances traveled for either business, work-related, or deductible purposes. The mileage log provides evidence for claiming mileage deductions on one’s tax return. It helps people and businesses accurately calculate and substantiate eligible vehicle-related expenses, which can result in potential tax savings. A proper mileage log is important to support the claimed deductions and avoid potential IRS investigation and disallowance of the deductions.
You can claim refundable tax credits
Refundable tax credits are particularly valuable for low-income taxpayers because they can provide a refund beyond what you paid for the year via withholding or estimated tax payments.
In other words, if it’s worth more than the tax you owe, the IRS will issue you a refund for the difference. Refundable credits include:
- Earned Income Tax Credit (EITC). The EITC is a tax credit for lower-income working people. For 2021, it’s worth up to $6,728, but you must meet strict income limits and other requirements to qualify. The income limits change each year and depend on your filing status and how many dependents you can claim. You can’t claim the credit if you have more than $10,000 of investment income. Review the IRS’s table of maximum adjusted gross income (AGI) amounts and credit amounts for 2021 to learn more.
- Child Tax Credit (CTC). The CTC is designed to help low- and moderate-income families offset the cost of raising kids. For 2021, it’s worth up to $3,600 for each child under age six and up to $3,000 per child age six through 17.
- Recovery Rebate Credit. If you didn’t receive a third Economic Impact Payment, also known as a stimulus payment, or didn’t get the full amount, you may be able to take it as a tax credit on your 2021 tax return. The third stimulus check, which the IRS started sending out in March 2021, was actually an advance payment of a 2021 tax credit.
- American Opportunity Tax Credit (AOTC). The AOTC helps offset higher education costs for full-time students in their first four years of college. It’s worth up to $2,500 per qualifying student, and up to $1,000 of the credit is refundable.