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It’s tax time!
Are you ready to file your 2021 federal tax return?
Before you do, make sure you’ve checked everything off your list so that your return is both complete and accurate.
Here’s a checklist of key tax numbers for 2022 that will help you make sure you’re on the right track, and we will highlight some last-minute tips here.
1. File On Time
The easiest thing taxpayers can do to make their tax filing go as smoothly as possible is simply filing on time.
The standard filing deadline is April 15th each year, but for the 2021 tax year, it falls on April 18th, 2022, due to the Emancipation Day holiday.
If you need to file an extension, doing so will extend your deadline to October 17th, 2022. It isn’t automatic, though. Make sure you properly request the extension if you need one.
Filing an extension may give you more time to file your return, but it won’t lengthen the clock for estimated payments. If you owe the IRS money in April, be sure you pay it in April, so you don’t get stuck with late fees and penalties.
Bonus: Gather and organize all of your critical tax forms such as social security numbers, W-2s, 1099s, receipts, and more.
2. Increased Tax Brackets for 2021 and 2022
Federal income tax rates are the same for 2021 and 2022, and those are:
0%
12%
22%
24%
32%
35%
37%.
However, the income levels where you enter the next higher bracket have changed due to inflation. Remember that your filing status (single, married filing jointly, head of household, etc.) determines the income level for each bracket, so be sure to check the correct table if you are doing some last-minute planning.
Even though you’ll file your state tax return separately, don’t forget to account for Virginia’s state income tax (or your state income tax) in your planning.
3. Standard Deduction
The most exciting part of tax time for most people is figuring out what they can deduct from their income before calculating their final tax bill.
You can either take the standard deduction or the total of your itemized deductions, whichever is more. The vast majority of filers—about 90%— will end up taking the standard deduction. Again, that amount depends on your filing status.
$12,550 for single or married filing separate
$25,100 for married jointly
$18,800 for the head of household
4. Should You Itemize?
If you can deduct the greater of your standard deduction or itemized deductions, then, of course, you’ll want to know what your itemized deductions are. Popular tax deductions include:
Healthcare expenses. Although healthcare expenses are a common deduction, only your healthcare expenses in excess of 7.5% of your adjusted gross income (AGI) can be counted as an itemized deduction. That may seem technical, so we’ll give a simple example with round numbers. Suppose your AGI is $100,000, and you have $10,000 in qualified medical expenses. Since 7.5% of $100,000 is $7,500, you can itemize $2,500 in excess medical expenses.
Charitable contributions. To maximize the value of your donations, consider ways to take full advantage of the tax benefits of doing so. Consider giving more significant gifts every few years rather than smaller gifts each year to bunch your donation to take advantage of the higher itemized deduction. You can use a donor-advised fund to accomplish that, which is a prevalent tax reduction strategy for higher-income earners. Also, if you have appreciated assets, you can donate them directly without having to incur the capital gain tax liability you would owe if you sold them first then donated the cash.
Mortgage interest. The Tax Cuts and Jobs Act decreased the mortgage interest deduction from $1 million to $750,000. So any home purchased after December 16, 2017, abides by the lower limit. You may also be able to deduct private mortgage insurance (PMI) or other insurance premiums if it applies. Keep in mind that you can no longer take a deduction for the interest paid on a home equity loan if you don’t use it to substantially improve your house.
State and local taxes. You can deduct up to $10,000 in SALT taxes, and typical examples include property taxes, income, and sales tax.
You may have other unique tax deductions available depending on how many qualified dependents you have, if you're self-employed, own a small business, etc. Our team is a fountain of tax tips and advice, and we love offering strategic tax advice for our clients.
5. Contribute Extra To Your Retirement Accounts
You also have time to make last-minute contributions to retirement accounts and your HSA. You have until your tax filing deadline to contribute for the previous calendar year, and this is a great time to add additional savings and reduce your overall tax liability.
Here’s a quick reminder of the annual contribution limits for your 2021 accounts:
HSA: $3,600 for self-only coverage and $7,000 for family coverage with an extra $1,000 in catch-up contributions when 55 or older.
IRA: $6,000 with an extra $1,000 in catch-up contributions when 50 or older.
Don’t forget to think about how this will affect you in retirement later. If you are near retirement, consider how your deduction now may mean a deferral that impacts your taxable income in retirement.
6. Organize Your Documents and Set Up Direct Deposit
Getting organized before you file will help ensure you don’t miss something. Gather your income reporting documents such as W-2s and 1099s and do your best not to leave any out. Then, locate verification for your itemized deductions and double-check the amounts.
Lastly, set up a direct deposit to expedite your refund. Most of the time, you’ll receive direct deposit weeks, if not months, sooner than having the IRS mail you a paper check. This may be especially important this year, with the IRS already announcing that we should expect a slow tax season.
7. Prepare for A Refund
Are you expecting a tax refund?
First, be sure to file early, as the IRS already anticipates massive delays this filing season. One way to speed up the filing process is to e-file online, whether you're filing your own taxes, working with a tax professional, or using a tax software. Doing so will ensure the IRS gets your documents faster and allows you to correct any errors in a timely fashion.
You can also set up direct deposit so the refund check can funnel directly into your bank account.
8. We Help With Tax Planning and Tax Preparation
Be mindful that proactive tax planning and tax preparation are two different things. Both are important, and together they can be a critical value-add that saves you time and money.
Ready to file your income tax return this year? Our helpful tax cheat sheet can help you make sure you get the most out of your tax preparation efforts, and we would be happy to help you as well.
Call today to get started!
About Scott Hurt, CFP®, CPA
Scott is a personal financial advisor with Covenant Wealth Advisors, a fee-only financial planning firm. He advises individuals age 50 plus on retirement income planning, investing, and tax planning strategies for a successful retirement.
Disclosures:
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment management, financial planning, and tax planning services to individuals age 50 plus with over $1 million in investments. Investments involve risk and does not guarantee that investments will appreciate. Past performance is not indicative of future results.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.