Know What’s Ahead This Tax Season

As tax time approaches, it’s a good idea to take stock of the changes that happened over the past year. With so much in flux, your tax picture may have changed as well.

If you usually receive a tax refund, you may be on track to see a check in the mail (or direct deposit) again. But for many taxpayers, this year could be different.

If any of these statements apply to you for 2021, be ready for a possible tax surprise:

• You received advance payments of the expanded Child Tax Credit.
• You took on freelance or contract work for extra income.
• You received unemployment benefits.
• You started a new job and chose a lower withholding rate on the W-4.

Understanding the Child Tax Credit
Last year, the Child Tax Credit (CTC) was expanded from $2,000 per child to $3,600 for each child under age 6 and $3,000 for children between 6 to 17. Half of the expanded CTC was paid in advance in 2021, in monthly checks from July through December. Parents who received those checks, and who still qualify, can claim the other half on their tax returns.

Parents who opted out of those checks may get a larger refund, as the full amount of the CTC will be applied at tax time.

Other families may not be so lucky. According to the IRS, the amount of advance Child Tax Credit payments that you received during 2021 is based on the IRS’s estimate of the CTC amount that you properly would be allowed for the 2021 tax year. The law requires this estimate to be based on these primary sources of information:

1. Your 2020 tax-year return; and
2. Any updated information you provided to the IRS in 2021, including information provided through the Child Tax Credit Update Portal (CTC UP).

If there were changes to your situation in 2021 that could have impacted your eligibility for a CTC, then some portion of the advance CTC could be in excess of what you were eligible for. If so, you may need to repay the excess amount of the CTC you received in 2021.

Others might get a positive surprise: families with babies or children born, adopted or fostered in 2021 will be able to claim the full CTC. They may also be able to receive a $1,400 stimulus check for the child, if they haven’t already.

Freelance income is taxed
If you took on work as a freelancer, independent contractor or gig worker in 2021, you should receive a Form 1099 that details your total taxable income. Depending on where you live, these earnings could be exempt from state income tax. One thing to consider: itemizing your deductions to lower your taxable income. Expenses related to the work you did can offset the money you made.

Did you receive unemployment?
In the past two years, a lot of changes have been made to unemployment benefits on the federal and state levels. For example, to help workers affected by COVID, the federal government made the first $10,200 of unemployment benefits tax-free for those with income below $150,000 in 2020. That waiver did not extend into 2021. Depending on how much tax was withheld from your weekly unemployment checks, you might owe more in taxes when you file your return.

Revisit your tax withholding choices
When starting a new job, you typically complete a Form W-4. It lets you select your filing status and deductions, how many dependents you have and any additional taxes you want withheld. If you opted for more deductions so you’d have higher take-home pay, that could mean you’ll owe money at tax time, or get a lower refund. You can adjust the Form W-4 at any time. If you end up with a tax surprise this year, think about updating it ahead of next year.

You have options
Do you owe an unexpected payment for 2021? It doesn’t have to derail your finances. If you don’t have the money to pay your tax bill by April 18,* the IRS offers installment plans that let you pay over time.

* This year’s tax filing deadline is April 18, 2022, instead of April 15, 2022, due to the Emancipation Day holiday in the District of Columbia. Taxpayers in Maine and Massachusetts have until April 19, 2022, to file their returns due to the Patriots’ Day holiday in those states.

The tax information contained herein is for informational purposes only. You should consult your financial adviser or attorney regarding your individual circumstances.