What This Tax Year May Look Like for You
Annette Nellen, professor, Lucas College and Graduate School of Business
Like clockwork, tax season officially started on Jan. 24. That means individual returns are now being accepted and processed by the IRS until the filing deadline on April 18 (due to Emancipation Day holiday in Washington, D.C., falling on Friday, April 15).
Many experts have already forewarned of a “messy tax year.” Taxpayer Advocate has also surmised that this year the IRS will continue to have poor customer service, and paper filed items, including returns, are still backlogged and not processed.
What does that mean for you? We asked Annette Nellen, CPA, Esq., professor and director of the Master of Science in Taxation program at the Lucas College and Graduate School of Business, what you need to know about filing your taxes this year.
What’s new for my 2021 individual tax return?
Annette Nellen: Most individuals will receive from the IRS in January Letter 6475, which will let them know how much Economic Impact Payment they received in 2021. Individuals with children below age 18 will also receive Letter 6419 noting how much child tax credit they received in advance in July to December 2021. This information is needed in filing their 2021 return. Taxpayers will need to reconcile the advance child tax credit against their true amount of child tax credit.
2021 is the last year of a charitable contribution for cash donations of up to $600 for a married couple filing jointly and $300 for others. Individuals must have a record showing how much they donated and to which charity. If the cash donation was $250 or more, they also need to have a “contemporaneous written acknowledgement” from the charity to get the deduction.
Self-employed individuals who were unable to work or telework in the first nine months of 2021 due to a specified COVID-19 reason may be able to claim a sick-leave credit against their income and self-employment taxes.
What advice and/or resources do you have for students and our campus community as they prepare to file their taxes?
AN: Students looking for tax assistance should see the IRS website, which offers free software, and e-file if their income is under $73,000. If their income is below the filing threshold, but they had tax withholding from their paychecks, they need to file to get that tax refunded to them.
The IRS offers several interactive tools at its website to help with various filing questions, such as its “Do I Need to File a Tax Return?” questionnaire. If they want free assistance from someone, they should check out these resources: Free Tax Return Preparation (irs.gov) and Tax Aid (tax-aid.org).
What should the general public/taxpayer know about the tax changes in the Build Back Better (BBB) Act, and if it doesn’t pass, what will be different for businesses and individuals?
AN: BBB is focused on “soft” infrastructure such as education and child care. Among tax changes is an extension of the higher child tax credit, which started in 2021, but only for one year.
Although, President Biden wants to make that permanent along with providing it in advance monthly, as was done for the last six months of 2021. There are also many green energy tax breaks, including an electric car and electric bicycle credit for individuals, and credits for businesses.
If it is not enacted, for 2022 through 2025, the child tax credit is $2,000 per child under age 17 with only $1,500 refundable. In 2026, it goes down to $1,000 per child.
What possible tax changes might we see from Congress beyond Build Back Better?
AN: On Dec. 31, 2021, about 30 tax rules expired. This included several energy credits. It also included a change made by the Tax Cuts and Jobs Act of 2017, which requires businesses to start capitalizing R&D (research and development) expenses rather than deduct them in the current year. This is a harsh rule for promoting innovation. The BBB proposed to extend the effective date of this provision by four years.
We may see a separate bill to extend various expired provisions and extend (or repeal) the R&D change. This might be done as a standalone bill or part of an appropriations bill, which is needed by Feb. 18, as the current continuing resolution only funds the government through then.
IRS Commissioner Rettig said last April that the tax gap is about $1 trillion per year. What is the tax gap, and should we be concerned about that large number?
AN: The tax gap is the amount of tax that is owed versus what the government actually collects. For many years, the IRS has estimated that the federal tax gap is about $400 billion per year. So, if it is really $1 trillion, that is a lot worse. The Treasury collects about $3.4 trillion dollars per year.
Ideally, changes are needed to reduce this figure because all compliant taxpayers are paying more to cover what others are not properly paying.
Have questions or need help? Visit the IRS website for more information.