At this time last year, I was anticipating a lot more changes in the rules, regulations and rates we would be facing today as we near another tax filing deadline. It didn't happen. However, that doesn't mean there haven't been changes. In other words, it's not -- nor will it ever be -- the time to put your tax planning on autopilot, there are always new twists and turns.
From an "opportunities" perspective, here are some tax time tips that stand out:
Monitor the Child Tax Credit
The American Rescue Plan bumped the child tax credit to $3,000 per child and $3,600 for those 5 and younger. Half of that, unless the taxpayer opted out, came in six monthly advance child tax credit payments from July through December of last year. You can claim the other half when you file your 2021 tax return.
Currently, there's no definitive answer as to whether this credit will extend beyond 2021, and that is both the potential pitfall and planning opportunity. On the positive side, use this, or other similar windfalls, to pay down debt, build savings or invest for other goals. Avoid incorporating this type of income into your regular spending. Doing so could leave you short, if the rules change.
Leverage the 12% Tax Bracket
Your tax bracket is the percentage of tax you pay on your last dollar of taxable income. That's your income after allowable deductions and exemptions. For 2022, the 12% tax bracket applies to taxable income from $20,550-$83,550. Established with changes during 2018, the 12% bracket is a topic worth discussing with your tax adviser.
It could provide a chance to make voluntary distributions from your retirement savings to take advantage of what is, from a historic perspective, a relatively low tax hit. Also, don't forget about mandatory minimum distributions. They are once again required, and if you miss them, you could face stiff penalties.
Explore IRS Breaks in the Form of Tax Credits
Typically, this has been a topic more suited to a younger audience. However, for 2021 returns, the earned income tax credit is available to a lot more folks. A new law makes the refundable tax credit available to those over 65, without dependents. The credit for the elderly or the disabled is another credit for which seniors may qualify. In either case, there is a new dimension to planning withdrawals and managing taxable income. Discuss your eligibility for these and other credits with your tax adviser.
Review Last Year's Charitable Contributions
In 2018, the standard deduction nearly doubled. According to IRS statistics from that tax year, this change resulted in nearly 90% of taxpayers utilizing the standard deduction instead of itemizing. Simpler, yes, but not necessarily a windfall for charities or charitable deductions. For 2021 returns, taxpayers who don't itemize will be able to take a limited deduction for charitable cash contributions. While it's limited to $600 for joint filers ($300 for single), every dollar helps.
April, like any other month, is a fantastic time to revisit your financial plan. While it's safe to say that taxes will always be with us, they are also ever-changing. Keep your hands on the wheel and ensure your plan keeps pace with all that change.
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