While you’re taking some time to prepare for the tax season, you might also want to give your financials a closer look. If your financial health is in good shape, congratulations! If you need help with your finances but aren't sure where to start, contact Freedom Finance today for a free consultation.
Get a head start on your 2021 taxes today.
Preparing now can save you time and money. Taking time to organize your tax documents and financial records can make the actual filing process faster and easier.
Use your prior year’s tax return to serve as a starting point to determine your previous income, deductions and credits reported. Wait to file until you have everything you need.
The following checklist from the IRS.gov website is a great place to start. Make sure to keep it all together in one place.
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- Forms W-2 from your employer(s)
- Forms 1099 from banks, issuing agencies and other payers including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan
- Form 1099-K, 1099-MISC, W-2 or other income statement if you worked in the gig economy
- Form 1099-INT if you were paid interest
- Other income documents and records of virtual currency transactions
- Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage
- Letter 6419, 2021 Total Advance Child Tax Credit Payments to reconcile your advance Child Tax Credit payments
- Letter 6475, Your 2021 Economic Impact Payment, to determine whether you're eligible to claim the Recovery Rebate Credit50% Off Coaching Sessions! Contact Freedom Finance Today!
Now that you have everything, where do you go from here?
You can choose to hire a professional tax preparer or choose to do it yourself. Doing your own taxes takes time and patience. If you don’t have either, it might be worth the cost of hiring a tax professional.
If you choose to do it yourself there is plenty of software out there to help you through the process or you can go through the IRS website. The IRS encourages online filing and directs taxpayers with incomes under $72,000 to its free filing portal which lists qualified tax preparers that offer free services.
Tax laws change constantly and it’s important to know what has changed and what you need to do. Two big changes made in 2021 are the Child Tax Credit and the Claim Recovery Rebate Credit. If you don’t have any dependents and didn’t qualify for the stimulus rebates last year, then these are two changes that won’t affect you. Most folks are affected by at least one of these.
If you received monthly child tax credit payments in 2021, the IRS isn’t going to tax that money when you file your tax return.
The payments were simply an advance of the child tax credit that you will claim on your 2021 return.
If you received all six payments (from July to December), the combined total of all your payments equaled 50% of the credit you’re expected to qualify for on your 2021 return.You will claim the other half when you file your tax return. (Some may have to pay back the IRS if they received too much money in relation to their earnings since the IRS used information from your 2019 & 2020 returns)
For 2021 only, the child tax credit amount was increased from $2,000 for each child aged 16 or younger to $3,600 per child for kids who are 5 years old or younger and $3,000 per child for kids 6 to 17 years of age.
In addition to increasing the credit amount and authorizing monthly advance payments, Congress made other changes to the 2021 child tax credit, too.
For example, the age for an eligible child was raised to 17, the credit is fully refundable, and the $2,500 earnings floor was removed. An additional layer of phase-outs was also introduced to prevent wealthier families from claiming a larger credit. The IRS will send out Letter 6419 to Child Tax Credit recipients outlining what remaining credit they have or need to pay back.
The Economic Impact Payments (the "stimulus checks") were sent out in 2021 to help people affected by the COVID-19 pandemic.
Now the time is approaching that taxpayers need to reconcile these payments with their 2021 tax returns. The IRS will send Letter 6475 that contains the total amount of the third stimulus and any Plus-Up Payments received. You should keep this and any other IRS letters about your stimulus payments with other tax records. You can also log in to IRS.gov Online Account to securely access your Economic Impact Payment amounts. Keep in mind that only eligible individuals who did not qualify for a third Economic Impact Payment or did not receive the full amount should claim the Recovery Rebate Credit on a 2021 tax return. Do not include amounts of missing first or second stimulus payments on your 2021 return.
If you are one of the millions affected by the pandemic and found yourself on the receiving end of unemployment benefits you may be wondering how does unemployment affect my taxes?
Unemployment benefits are generally taxable. Most states do not withhold taxes from unemployment benefits voluntarily, but you can request they withhold taxes. By not paying taxes via withholding, you risk an underpayment penalty. Plus, you will have a larger tax bill when you file. Unemployment compensation is not considered “earned” income for the Earned Income Tax Credit (EITC). How much you pay will depend on your tax bracket and how much taxable income you have.
People often ask, “Am I withholding enough taxes from each paycheck?” The amount of federal and state taxes you withhold from each paycheck determines whether you’ll get a refund, break even, or owe taxes when you file your tax return.
The goal is to eliminate any surprises at tax time. Some taxpayers like to get a large refund, some prefer a small refund, and others prefer a small balance due, taking comfort in knowing they didn’t make an interest-free loan to the government. Regardless, everyone should aim to withhold at least enough to avoid any underpayment penalties.
The easiest way to determine if you are on track is to use the IRS tax withholding estimator. Click here to get started.
The results from the calculator can help you figure out if you need to fill out a new Form W-4 or point out that you need to make an estimated tax payment to the IRS before the end of the year.
While you’re taking some time to prepare for the tax season, you might also want to give your financials a closer look. If your financial health is in good shape, congratulations! If you need help with your finances but aren't sure where to start, contact Freedom Finance today for a free consultation. Remember, you are in control of your finances and acting now is key to financial freedom.
