TAX INFORMATION - INDIVIDUALS: Information You Need to Know

The 2021 tax return season is underway.?In the next 11 weeks millions of US individual taxpayers will prepare and file their 2021 income tax returns.?To improve the process of filing your 2021 income tax return I have some tips for you.

Rather than create a list of tax changes affecting your 2021 income tax return (there weren’t many changes, but here’s a link to tax changes), I’d like to focus on general “filing” processes that will improve your tax return filing.

Gathering your tax information is the first step in filing your tax return.?Many individuals receive most of their tax information from third-parties (banks, financial institutions, employers…) who have deadlines for delivering your tax information to you.?Below are the deadlines for receiving your basic tax information:

TAX INFORMATION DEADLINES

W2 (wages)– January 31, 2022

1099-Div/Int (dividend & interest income)– January 31, 2022 (traditionally late by 4 weeks)

1099-B (stock sales)- January 31, 2022 (traditionally late by 4 weeks)

1099-NEC/MISC (self-employed income and rents) – January 31, 2022

1098 (mortgage interest) – January 31, 2022

Charitable Donations – There is no deadline for receiving charitable donation confirmations, but you must have written confirmation for any/all individual donations for $250 or more.

Childcare expenses – There is no deadline for receiving your childcare expense confirmation, but you must have the provider’s name, address, and tax ID to claim childcare expenses.

If you haven’t received your tax information by the due date, or been notified of a delay, contact the third-party.

TAX RETURN DUE DATE

Individuals must file their 2021 income tax return by 04/18/2022.?The IRS will begin accepting e-filed income tax returns on 01/24/2022.?If you cannot file your tax return by 04/18/2022 you can get an extension to file your tax return (but not an extension to pay your tax, your tax liability is still due on 04/18/2022) until 10/17/2022.?If you are expecting a tax refund, you should e-file your tax return to receive your refund as expediently as possible.

TAX DEDUCTIONS

Taxpayers have always had the option to either “itemize” (use Schedule A) their tax return deductions (medical, tax, interest, and charitable donations), or use the “standard deduction” if it is greater.?For your 2021 income tax return the standard deduction is $12,550 for single taxpayers, and $25,100 for joint taxpayers.

Before going further I’d like to discuss the misconceptions about itemized deductions and the standard deduction which I like to call the “bar-stool” tax conversation.

Over the decades that I have been preparing tax returns, I have been a party to, and overhead conversations about income tax returns, and I’m constantly amazed at the lack of people’s understanding of the US tax system and the apathy to get accurate information.?Instead, ill-informed taxpayers, performing an annual legal obligation to file an income tax return (which they have most likely complied with since they were teenagers) accept as “truth” tax advice from a stranger sitting on the bar stool next to them.?Makes a whole lot of sense, right??Well at least the “advice” was free but consider the source!

Please understand whether you itemize your deductions or take the standard deduction, you can select the method that provides you with the greatest tax benefit, and you get to make this election every year.?The rule of thumb on whether to itemize or take the standard deduction usually hinges on whether you own a home.?Since the “Tax and Jobs Act of 2017” most taxpayers no longer benefit by “itemizing” their tax deductions because the standard deduction has been significantly increased.

Here’s an example for a homeowner joint tax return with $100K in total income:

2021 Standard Deduction -$25,100.

2021 Itemized deductions:

Medical expenses - $6,000 (non-deductible because it doesn’t exceed 7.5% of income)

Taxes – Real Estate taxes $3,000, vehicle taxes $2,000

Interest – Mortgage interest $9,000

Charitable Donations - $10,000

Total Schedule A deductions - $24,000

Since the standard deduction for this homeowner is $1,100 MORE than itemizing deductions, this taxpayer should take the standard deduction and receive a tax deduction $1,100 MORE than their actual expenses.?This taxpayer, like many, benefits more with the increased standard deduction, rather than itemizing.

Now for the bar-stool conversation:

You filed a tax return, taking the standard deduction, and received a refund of $1,000.

The person on the bar-stool next to you says, “I spent several days gathering receipts for medical expenses, taxes, interest and donations that my accountant asked for, and I got a $7,000 refund (more on this bar-stool statement shortly).?You need to contact my accountant.”?There’s just so much misinformation in that statement, which you will most likely relay to your accountant.

First, the other accountant had the client unnecessarily spend valuable time gathering receipts for itemization, when 89% of last year’s taxpayers benefited more by taking the standard deduction. ?Second, the accountant used the standard deduction because it was greater, but the client didn’t even look at their tax return to see that their efforts and time were not even beneficial.?And third, basing the quality of your accountant on the amount of your refund is something the national tax return companies have been promoting for years and manipulating for their own benefit.

To someone who has made no effort to understand the tax laws they have been subject to for decades, obviously the larger the refund, the better the accountant.?This misconception needs correcting.

My favorite example for explaining the how size of your refund can be manipulated by your accountant, and how it has nothing to do with the competence of your accountant, is going to a restaurant.?Remember, the amount of taxes withheld from your paychecks, or paid through estimated taxes, are “pre-payments” of your tax.

Example:?Imagine 2 people walk into a restaurant.?One, gives the host $100 towards his meal bill before being seated. The other gives the host $1,000.?Both customers eat $50 in food.?On the way out, the first customer receives a refund of $50, and the second customer receives a refund of $950.?So clearly, based on this example, the second customer paid less for his meal because his refund was greater.?Right??The person on the bar-stool next you wants you to believe this.?H&R Block and Jackson Hewitt want you to believe this as well.?Watch their TV commercials during tax season, that’s what they promote, the SIZE of refunds is what makes them fantastic tax preparers.

Obviously, you can see the fallacy in this argument.?The refund amount is not important.?What determines the competency of your accountant is how much tax was DUE relative to the total income (after deductions).

For a small fee, the national tax return companies will help you set your paycheck withholdings or calculate your estimated tax payments.?Want to bet they over-estimate your tax liability for the next year and increase the withholding on your paycheck, or increase the amount of your estimated tax payments??If they over-estimate your liabilities, you’ll get a larger refund next year, but you’re still getting the same $50 meal as the other restaurant customer.?Don’t be fooled!

Want to make sure you are paying the least amount in taxes? ?Contact ARI.