By Barbara O’Neill, Ph.D., CFP®, firstname.lastname@example.org
The OneOp Personal Finance team held its annual income tax update webinar in February. The webinar focused on information taxpayers need to know to complete 2021 tax returns due April 18, 2022.
Below is a summary of ten webinar highlights:
- Tax Filing Side Benefit– Filing an income tax return provides valuable insights into someone’s personal finances. These insights include saving and investment earnings, retirement plan contributions, net earnings from freelance work, and awareness of one’s marginal tax bracket and potential tax-saving strategies.
- Military-Specific Tax Rule- The child tax credit requires that a family live in the U.S. for more than half of the year. U.S. military personnel stationed outside the U.S. on extended active duty are considered to have a main home in the United States for purposes of claiming the child tax credit.
- Advance Child Tax Credit (CTC)- Monthly payments were made from July to December 2021 totaling half of the full 2021 CTC amount: $3,600 for each child age 5 and under and $3,000 for each child age 6 through 17. The 2021 CTC is fully refundable, which means it can generate a tax refund greater than the amount of tax owed. Eligible taxpayers (parents) received IRS Letter 6419 to help prepare their tax return.
- Settling Up– Letter 6419 indicates how much Advance CTC was received in 2021 as a result of provisions in the American Rescue Plan Act. Taxpayers were told to save this letter for future reference. The amount indicated in the letter is subtracted from the total CTC available to calculate the net CTC. For example, a CTC of $10,200 minus $3,300 in Advance CTC payments results in a net child tax credit of $6,900.
- Child and Dependent Care Tax Credit (CDCTC)- For 2021 taxes only, under provisions of the American Rescue Plan Act, the CDCTC is substantially more generous than normal: up to $8,000 for one qualifying person and $16,000 for two or more qualifying persons. In 2022, these expanded amounts revert back to normal CDCTC limits of $3,000 for one qualifying person and $6,000 for two or more.
- Third Economic Impact Payment- Also known as “stimulus,” payments were based on prior year tax data. Taxpayers who experienced a decrease in income in 2021 may be eligible to claim a Recovery Rebate Credit on their 2021 tax return if they didn’t get a third stimulus payment or got less than the full amount.
- “Yes/No” Questions- Taxpayers should not “slide by” questions on tax returns that require a “yes” or “no” answer. Ditto for using “N/A” or “not applicable.” For example, questions about foreign accounts or ownership of cryptocurrencies. The IRS wants to have taxpayers “on record” in the event of a perjury case.
- Retirement Account Contribution Limits- The contribution limit for tax-deferred retirement savings plans increased in 2022 to $20,500, up from $19,500 in 2021. The limit for workers age 50+, with the $6,500 catch-up contribution, is $27,000. The contribution limit for Roth and traditional individual retirement accounts (IRAs) remains unchanged at $6,000 ($7,000 age 50 and older).
- Other Inflation-Indexed Changes- Modest adjustments were made in 2022 to contribution limits for health savings accounts (HSAs), the annual gift tax exclusion ($16,000 in 2022 vs. $15,000 in 2021), and the lifetime estate tax exemption ($12.06 million in 2022, up from $11.7 million in 2021).
- Changes in the Appearance of Tax Forms- 2021 tax forms moved further away from the concept of a “postcard” tax return. Form 1040 and its supplemental Schedules 1, 2, and 3 have gotten longer with many more details. In addition, there is no longer a carryover of the adjusted gross income (AGI) number from page 1 to page 2 of the 1040 form, a reflection of the fact that most taxpayers no longer file paper returns.
Copies of the webinar slides and an archive of the recorded video are available on this OneOp webinar website.