Tax season is right around the corner and there are some important changes to be mindful of according to Freedom Retirement Services.
Child Tax Credit
One of the major changes involves the Child Tax Credit. The American Rescue Plan expanded the tax credit from $2,000 to the range of $3,000 to $3,600, depending on the child's age, for low to mid-income households. The expansion converted the credit into a monthly series of payments families received in 2021.
Parents who received the monthly payments in 2021 can not claim the credit on the 2021 taxes because it was already received. Information from 2020 tax returns determined eligibility for most people. However, if any of the qualifying information changed in 2021, it may affect a family's refund.
Matt Rowley, the president and founder of Freedom Retirement Services said, "Some folks may have gone into a higher tax bracket and could potentially have to pay back the child tax credits from 2021."
The IRS is sending a letter summarizing the payments, but filers are encouraged to estimate their adjusted gross income as soon as possible to be aware of changes to their refund.
Standard Deduction.
The IRS increased the standard deduction for filing 2021 returns.
For married couples filing jointly, the standard deduction increased from $24,800 in 2020 to $25,100 for 2021 tax returns. For single taxpayers and married individuals filing separately, the standard deduction increased from $12,400 to $12,550. For heads of households, the standard deduction increased from $18,650 to $18,800.
People also have the option of manually itemizing their deduction. Rowley encourages people to run the numbers both ways to see which method produces the lower tax bill.
Charitable Giving
The Taxpayer Certainty and Disaster Tax Relief Act allows for a charitable contribution deduction. Individuals, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction has increased to $600 for married individuals filing joint returns. The gift must have been made via cash, check, credit or debit card and go directly to the charity.
Preparing for tax season year-round
Rowley says the further ahead people plan for their tax situation, the better chance they have at reducing tax burden. He said financial planning overall will also benefit people by getting them ready for a prosperous financial future. According to the founder of the Freedom Retirement services saving for retirement or building up a college fund can align with several financial goals.
If you would like to learn more about Freedom Retirement Services, click on the link. https://www.freedomretirementservices.com/
(Freedom Retirement Services contributed to this report.)
