Welcome to the topic Some Changes That May Affect Next Year’s Tax Returns.
Many factors can contribute to how your tax returns end up looking. Next year’s tax returns will be no different.
There are some policy changes on the horizon that may affect your tax returns, so it is good to become aware of these changes beforehand and even make use of some policies that may phase out soon.
Economic Impact Payments and Recovery Rebate Credit
Depending on their 2021 tax information, those who did not meet the requirements for the third Economic Impact Payment or did not get the full amount may be qualified for the Recovery Rebate Credit. To claim the credit, they’ll need to submit a 2021 tax return, even if they don’t regularly do so.
Individuals will also require the amount of their third Economic Impact Payment, as well as any Plus-Up Payments, to determine the right amount of the 2021 Recovery Rebate Credit when filing their tax return. Using the exact payment quantities can assist them in avoiding a processing delay, which could cause their return to be delayed.
The IRS will send Letter 6475 in early 2022, which will include the total amount of the third Economic Impact Payment as well as any Plus-Up Payments received. This letter, as well as any previous IRS letters about stimulus funds, should be kept with other tax records. Individuals can also access their IRS.gov accounts.
Child Tax Credit Payments
Those who got advance payments will need to compare the sum of the Child Tax Credit they will be able to claim on their 2021 tax return with the amount of the Child Tax Credit they will get in 2021.
On their 2021 tax return, taxpayers who received less than the maximum amount of Child Tax Credit will claim a credit for the leftover amount. When filing their taxes, taxpayers who received more than the amount for which they are qualified may be required to reimburse some or all of the excess payment.
The IRS will send Letter 6419 in January 2022, detailing the total sum of advance Child Tax Credit payments that filers received in 2021. This letter, as well as any other IRS letters about advance Child Tax Credit payments, should be kept with tax documents.
Qualified families who did not get monthly advance payments in 2021 can still receive a lump-sum payment by filing a 2021 federal income tax return next year and claiming the Child Tax Credit. This would include families that aren’t required to file a tax return on a regular basis.
Health Insurance Premiums
In March, Congress raised premium subsidies for health insurance, making coverage more affordable for millions of Americans.
Although the exchange has temporarily set premiums at 8.5 percent of household income, filers may be required to refund some benefits if their incomes surpass the 2021 thresholds.
Filers may predict 2021 income now, comparable to the child tax credit, in order to determine liability and lay aside money for a future bill.
State Sales Tax
If you live in a state without a state income tax, this deduction is especially valuable. Itemizers can choose to deduct either their state income taxes or their state and local sales taxes.
Whichever option saves you the most money is your choice. If your state does not levy an income tax, the sales tax deduction is unquestionably the best option.
Even those who pay state income taxes may benefit from the sales tax option in some situations. It’s also not necessary to have a wheelbarrow full of receipts.
Depending on their income and state and local sales tax rates, the IRS publishes a calculator that displays how much people of various states can deduct. When the calculator throws out your total sales tax deduction amount, it will include the tax you paid on that major item, whether you bought a car, yacht, or aircraft.
The sales tax write-off is combined with your local property taxes, and the aggregate sum of these taxes is limited to $10,000 each year ($5,000 if you’re married but filing a separate return). The State and Local Taxes (SALT) deduction cap is the conventional name for this limit.
The Build Back Better Act, which is now making its way through Congress, would offer some relief to taxpayers who have been caught in the net of this cap. Nevertheless, we don’t know if the bill will succeed or if the SALT cap measures in the bill will be amended or repealed at this time.
Credit For Dependents
Since July, the IRS has begun sending American parent’s monthly payments for the child tax credit. Sadly, you won’t be able to take this credit to reduce your tax payment in 2021 if your son or daughter is over 17 years old (over 16 in other years).
Nevertheless, for dependents who do not qualify for the child tax credit, there is an additional $500 credit. Even if they’re in college, your older children can still help you save money on taxes. You can even claim the credit if you’re providing care and support to elderly relatives at home.
However, if your adjusted gross income is greater than $200,000 ($400,000 for married couples filing jointly), the total sum of the child credit and the credit for extra dependents is phased out.
Mortgage Insurance Premiums
If you itemize your deductions, homeowners who pay private mortgage insurance on loans made after 2006 can deduct their premiums. (If you put down less than 20% on a home, you’ll likely be charged PMI.) If your AGI surpasses $100,000, the deduction is tapered down, and if your AGI exceeds $109,000, it’s gone ($50,000 and $54,500, respectively, if you’re married but file a separate return).
For the number of premiums, you paid during the year, look at Box 5 on the Form 1098 you received from your lender. Line 8d of Schedule A should be used to report the deductible amount (Form 1040).
After the 2021 tax year, this deduction will be phased out.
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