Timely Tips for Filing Your 2021 Tax Return
Sorry to be the bearer of bad news but filing your 2021 tax return may be one frustrating experience — especially if you're expecting to get a refund.
Recently, U.S. Treasury Department officials conceded in a phone call with reporters that the Internal Revenue Service (IRS) will face "enormous challenges" this filing season; the agency will start accepting federal income tax returns Monday, January 24.
The problems? The IRS is backlogged, many centers that process paper returns have been closed due to COVID-19 and the agency is understaffed (its customer service workforce is down 40% since 2010). What's more, last year's stimulus payments and the expanded child-care tax credit have added filing complexity.
That means 2021 tax refunds are likely to be delayed; usually electronic refunds come three weeks after filing, a week faster than ones for paper returns.
Based on last year's experience, getting answers from the IRS will be even harder than usual, too. According to The Washington Post, the National Taxpayer Advocate watchdog group said that in 2021, just 3% of calls were answered by the IRS' 1040 support line for individual income tax returns.
But in the new episode of the "Friends Talk Money" podcast I host with personal finance mavens Terry Savage and Pam Krueger, the three of us — along with IRS spokesman Eric Smith offered advice to help taxpayers file their returns.
I'll share tax tips from the podcast here. (You can listen to the entire "Friends Talk Money" episode wherever you get your podcasts or here.)
One important date to know: For most people, the tax-filing deadline this year is April 18th, not April 15th, due to Washington, D.C.'s Emancipation Day. Residents of Maine and Massachusetts have until April 19th because of Patriots' Day in their state; victims of tornados and wildfires in Colorado, Illinois, Kentucky and Tennessee have a May 16th deadline.
Consider Filing Electronically This Year
The top tip for your 2021 taxes from the "Friends Talk Money" podcast hosts and Smith: file your return electronically, rather than on paper, if you can. It's likely to be processed faster that way and if you'll be due a refund, it'll come sooner.
"Fewer mistakes happen when returns are filed electronically," Smith said.
If you do expect a refund, tell the IRS you want to get it by direct deposit; that'll save time, too. You can track your refund status at the Where's My Refund? area of the IRS website or through the agency's IRS2Go app.
Savage noted on the podcast, sadly, that many taxpayers still haven't received their 2020 tax refunds for returns filed last spring. Said Smith: "We are doing our best to work through that inventory and get people the money that they very much deserve."
One wrinkle for 2021 refunds is that the IRS isn't allowed to issue ones involving the additional child-care tax credit or that and the earned income credit before mid-February.
Did You Have Enough Taxes Withheld in 2021?
If you received a stimulus payment last year, when preparing your return, you'll want to use information from the IRS Letter 6475 you should have received. And if you received the extra child-care credit, you'll want to use information from IRS Letter 6419.
One tip I offered on the podcast: If you donated to charity last year, you'll be able to claim a deduction on your 2021 tax return whether you'll itemize deductions or not. The maximum write-off is $300 for single people and $600 for married couples filing jointly.
Savage advised all taxpayers to see if they had enough taxes withheld in 2021. "If you didn't withhold at least ninety percent of your tax liability or a hundred percent of what you paid in [taxes in 2020], you're going to want to make a quarterly estimated payment in January to avoid penalties," she said.
Fourth-quarter estimated taxes are normally due January 15th, but this year the date is January 18th due to Martin Luther King Jr. Day, Savage noted.
Krueger offered this tip for people who filed estimated taxes last year because they were self-employed, freelanced or had income as an Airbnb host: "If you feel you overestimated your income, to file for a refund you're going to use the 1040-ES form and that refund can be applied to your future quarterly estimated taxes."
One more piece of bad news — if your 2021 income was $73,000 or less and you planned to save money by using the IRS' Free File program to file a return electronically through one of its partners, know this: TurboTax and H&R Block aren't participating.
Looking towards 2022 taxes, Savage said, people 72 and older should pull together their 2021 statements from their traditional Individual Retirement Accounts and their 401(k)s to see how much they'll need to withdraw as their Required Minimum Distributions (RMDs) this year to avoid owing tax penalties. There are no RMDs for Roth IRAs.
I mentioned on the podcast that a new study by the Hearts & Wallets financial services research firm found that the biggest money management topic pre-retirees said they needed advice on was developing a strategy for withdrawing income from their different accounts.
So, if you're nearing retirement, you might want to meet with a tax pro or financial adviser to help make the right withdrawal moves — but maybe wait till after April 18th, when things have cooled down.
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of How to Avoid a Mid-Life Financial Crisis and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch.