5 Unique Things You Should Consider Before Filing Your 2021 Tax Return
Welcome to tax time!
While you know you need your W-2s and Social Security number, several other elements could impact your tax return. Here are five things to consider before filing your 2021 tax return.
1. The Standard Deduction Increased
The IRS periodically adjusts many items within the tax code to account for inflation, and the standard deduction is one such item. As you’re getting things together for your 2021 filing, the standard deduction is $12,550 for single filers, $18,800 for heads of household, and $25,100 for married filing jointly.
Then, starting for the 2022 tax year (which you will file in the early part of 2023), the standard deduction levels are $12,950 for single filers, $19,400 for heads of household, and $25,900 married filing jointly.
Why is this good to know?
Because you can deduct either the greater of your itemized deductions or the standard deduction. Knowing whether you are exceeding the standard deduction or how close you are to exceeding it will let you know if a last-minute donation or other deductible item provides you with any tax benefit.
If your itemized deductions are too low, then you aren’t really getting the full effect of the tax deduction.
2. Check If You're Eligible for Any New Deductions
There are probably certain deductions that you think about each year simply because you regularly have them, so they are top of mind come filing time. However, things aren’t always the same from year to year, so it’s helpful to at least do a quick check through the deduction list to see if any new ones apply to you.
Some common examples of items to look for are:
- Health Care Costs
Did you spend more than 7.5% of your AGI on health costs? If so, you can claim the amount that exceeds 7.5% of your AGI as a deduction. This might be the case if you had an accident or surgery that drove your costs up higher than they usually are.
- Charitable contributions
You may regularly deduct charitable contributions, but you may also be able to maximize the deductibility of donations you already make by simply altering the timeline a little bit.
You may be able to increase your deduction by simply donating larger amounts less frequently. This strategy is called bunching and essentially means you make several years' worth of your average donation amount in a single year so you can exceed the standard deduction for that year. Doing this with a donor-advised fund allows you to take advantage of the larger donation and control the payout to the charity.
- Work and Life Changes
Many people have experienced significant changes in both their living arrangements and work situations this past year. Selling and buying a home or leaving a job for self-employment can both have consequential tax implications.
If either of those applies to you, pay particular attention to changes in the following: your mortgage interest, state and local taxes, home office expenses, and business costs.
If your mortgage balance is different from your old one, or you live in a location with an additional local tax burden that will affect your ability to deduct state and local taxes (SALT) on your federal tax return. And of course, if you work from home and have a dedicated working space, you can deduct a portion of your expenses for maintaining that workspace.
- General Life Changes
Some life changes mean you have the opportunity for some new deductions or that some may no longer apply.
Getting married or divorced will mean a different standard deduction applies to you. Since the benefit of itemized deductions depends on exceeding your standard deduction, this one event could completely change the value of itemizing for you.
If you’ve had a kid in the past year, you can get a tax benefit for childcare expenses. Or you may have had a parent move in with you so that you could take care of them. You may be able to claim them as a dependent if they meet specific qualifying criteria.
3. Not Itemizing? You Can Still Donate To Charity
Even if you don’t itemize your deductions because the standard deduction is greater, you can still get a small tax benefit from cash donations made to charities.
If you make cash contributions to charities, you can claim a deduction up to $300 if you are a single filer or $600 if you are married and file a joint return with your spouse.
4. Catch Up On The Expanded Child Tax Credit
Whether you received advanced payments on the expanded child tax credit or opted out of them, make sure your tax filing accurately reflects your situation so that you end up getting the correct amount.
To help with that process, the IRS sent Letter 6419 to anyone who received advanced payments. This letter details how much you were paid and how many children the IRS based their calculation on. Of course, if the information in your letter is incorrect, you need to address that in your filing.
Remember that the advanced payments were only up to half of the total amount you qualify for. Filing properly will ensure you get the second half of the credit.
5. File Early And Online
As if tax filing wasn’t enough of a drag, the IRS has already announced that they expect this filing season to be slow and cumbersome.
You can make the process smoother for yourself by filing early—as soon as you have your information in order—and by filing online.
Even in a typical year, returns filed online are processed more quickly than paper returns. If you are expecting a refund, consider establishing a direct deposit if you haven’t already to further expedite the payment process.
Work With Trusted Professionals
As you are getting ready to file your tax return, carefully consider anything that may have changed for you in the past year. You don’t want to miss out on any deductions you didn’t know to look for.
First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death.
We help clients develop a financial roadmap to help simplify their financial future.
Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department or its employees provides tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.