It’s crunch time — as in, time to finally crunch your numbers if you haven’t yet, because Tax Day is less than a week away.
Every tax season has a concluding surge and it looks to be the same ahead of this year’s federal income tax deadline which is Monday, April 18, for most people.
By early April, the Internal Revenue Service received over 91 million returns. It’s planning to get more than 160 million returns in 2022. The tax agency is projecting some 15 million extension requests to file by Oct. 17. Put it all together and that shows the swath of people expecting to file in the coming days.
Down-to-the-wire filing is common, but this year has special twists. Even as the pandemic recedes from everyday life, its tax implications are front and center. That’s because federal lawmakers early last year made tax code changes to put more money in the pockets of families at a crucial time.
Some of those provisions, like stimulus checks and child-tax credit payments, resulted in immediate payoffs last year. Others, like the improved Child and Dependent Care Credit and the Earned Income Tax Credit, were designed to come during 2022 tax filing season — in other words, during the filing window that’s closing most places on April 18. (For taxpayers in Maine and Massachusetts, the deadline is Tuesday, April 19 because of observance of Patriots’ Day in those states.)
“A person who speeds through a return now could overlook eligible credits and leave money on the table.”
A person who speeds through a return now could overlook eligible credits and leave money on the table that, some say, is contributing to richer 2022 refunds.
The average refund, as of earlier this month, was $ 3,226, which is 11.5% higher than last year. For example, one-year-only changes to the Earned Income Tax Credit could unlock extra tax cash for an estimated 2.8 million older taxpayers, according to AARP.
A sprint could backfire another way. If there’s a mistake, administrators at the backlogged IRS say that’s going to delay a refund. Back in January, IRS Commissioner Charles Rettig warned frustrations could be part of this year’s filing season.
“Get it right. Don’t file it by guessing and getting it wrong, because the IRS is going to take forever to process those,” said David Tolleth, president of the National Association of Enrolled Agents.
For anyone with big open questions about what they are entitled to, the better move now is filing an extension, he said. In his own practice, Tolleth is clocking 12-hour workdays now as he deals with “clients coming out the woodwork.”
Here are 7 tips to make the process run smoother:
1. Ditch paper
The quickest way for the IRS to process a return and turn around a refund payment is when taxpayers file electronically and authorize a direct deposit. Around 96% of tax returns this year have been filed electronically, Rettig said at a recent Congressional hearing. The turnaround is generally under 21 days if not sooner, he added.
Paper returns get bogged down because of the IRS’s labor-intensive means to transcribe and process — and it’s a “first in, first out” system, Rettig said. That means the IRS has to get through 2.7 million paper returns received last year before it can work on the 2.3 million paper returns received so far this year.
2. If you want to file an extension, don’t be shy
The IRS is expecting 15.2 million households to seek extensions this year. That’s accomplished with a so-called Form 4868 that can be filed electronically for free. Remember what you’re getting breathing room for: extra time to file a tax return through Oct. 17, not extra time to pay a tax bill.
The IRS will work out installment plans with taxpayers who lack the cash on hand to settle their tab. But financial penalties surrounding the failure to file a return, or at least an extension by April 18, are steeper than the penalties and interest connected to a failure to pay.
The failure to pay penalty is 0.5% of unpaid taxes “for each month or part of a month the tax remains unpaid,” the IRS notes. But it’s 5% in the same period for a failure to file.
Tolleth’s heard people say they fear they’re going to owe they cannot afford now, so they’ll skip filing for now on the worry they’ll have to pay up too. Wrong move, he said. “Make any payment you can,” because that will shrink the penalties and interest. “Be sure to file an extension,” he added.
3. Still waiting for last year’s return to get processed? Try the $ 0 trick
Taxpayers waiting for their 2020 tax return to get processed should still file their 2021 return by the upcoming deadline or seek an extension, the IRS says. For information seeking the amount of last year’s adjusted gross income, put down $ 0, the agency says.
This is a special note for people who do their own taxes, submitting them electronically. They’ll have to sign and authenticate the return. One way to do it is including the adjusted gross income from last year.
Here’s where you enter $ 0 for last year’s adjusted gross income to proceed. Tax software usually puts that information in for repeat customers, but you may need to manually enter the $ 0 or do so for a product used for the first time, the IRS says.
4. Accurately state your Child Tax Credit and Economic Impact Payments
During 2021, the IRS already paid out a third round of stimulus checks and six monthly advances of the enhanced child tax credit to households. Tax time 2022 is where the IRS squares up with taxpayers and figures out what people still owe for a missed payment or an addition to the household – e.g. a newborn child — it didn’t know about during the initial payments.
For the child tax credit, tax time is also when the IRS skims money off refunds to reconcile overpayments for households that got the advances but earned too much money.
That makes it especially important for taxpayers to accurately state the amount they’ve already received.
Anyone seeking owed stimulus check money via the “recovery rebate credit,” has two ways to confirm the amount already received. The IRS already sent out “Letter 6475” stating the amount. People with an online account at the IRS can access the number looking under “tax records.” The IRS also sent a document (Letter 6419) outlining the amount already paid under the child-tax credit. That amount paid can also be found in the online account, the IRS said.
5. Don’t forget the Child and Dependent Care Credit
This credit isn’t to be confused with the child tax credit. This one is meant to help families offset their childcare costs while they go to work — and it got a lot more generous this tax season.
The credit previously paid up to $ 1,050 for a single child or eligible adult dependent, and $ 2,100 for two or more. After changes in the 2021 American Rescue Plan, that payout climbed to $ 4,000 for a single child or adult dependent and up to $ 8,000 for two or more.
Likewise, income eligibility and phase-outs on the credit loosened up considerably for one year only. For example, the full credit previously topped out for households making under $ 15,000 a year. This year, the phase-outs start at the $ 125,000 point.
There’s some extra paperwork to claim this credit, but it may be worth it. The IRS will ask for Form 2441 and want to know the information of the care provider, like the name, Social Security Number or Employer Identification Number.
6. Don’t forget the Earned Income Tax Credit
This tax credit aimed at low- and moderate-income working households also got a temporary turbo charge for 2021. Even before this year, observers worried too many eligible taxpayers are missing out.
The credit is an important boost for families with kids to feed, but the people benefitting the most from the temporary tax tweak are taxpayers without children under their roof.
Before the American Rescue Plan, eligible workers without kids were poised to receive an approximate $ 500 maximum. This year, that maximum can be triple the size at $ 1,502. Workers without kids can access the full amount so long as they make up to $ 21,430 ($ 27,380 for married couples filing jointly).
The credit is richer and it applies to wider age demographic. It traditionally applied to taxpayers between age 25 and 64. This year, it generally starts applying at age 19 and has no upper age limit.
That’s an important potential windfall for an estimated 2.8 million older workers, said Elaine Ryan, vice president of benefits access at AARP Foundation. That is, so long as they are aware of the chance.
“In this instance, there could significant financial benefits to ask questions, apply and see what you are eligible to receive,” she said. Accessing the federal EITC money could also lead to related payouts in the states that offer their own version of the earned income tax credit. Those state-level credits can average at $ 600, Ryan noted.
It can be confusing to find free tax preparation, but Ryan noted AARP Foundation offers free assistance through the Tax Counseling for the Elderly programs it operates and its Tax-Aide program.
7. Cryptocurrency and taxes
The IRS wants to make sure anyone who has cryptocurrency is being fully upfront on their taxable gains.
That’s why there’s a ‘yes’ or ‘no’ question high up in the 1040 asking “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?
Some of the scenarios to say ‘yes’ include receiving virtual currency like bitcoin or ethereum as payment for goods or services, as a gift or selling it. Changing from one cryptocurrency to another counts as a ‘yes’ too, the IRS says. On the other hand, if taxpayers have crypto but are just holding it in their wallet, that’s can be a ‘no.’
These are tax considerations more people need to figure out as cryptocurrency gains more traction. An estimated 19% of U.S. adults owned had some type of cryptocurrency as of mid-March, according to a Morning Consult poll.