When it comes to taxes, many people now are focused on trying to track their refund. Or they’re looking forward to getting a monthly check beginning around July 15 for an advance of the Child Tax Credit.
But plenty of people should consider whether they’re going to have enough money withheld this year to cover the taxes owed in 2022.
It may be a good time to check – and possibly adjust – your withholdings to make sure you’re not having too little tax withheld. And you can’t just ignore money that arrives from the Child Tax Credit, either.
Some situations could lead to a nasty surprise next year when you file your 2021 income tax return. Here’s a look.
Are you collecting jobless benefits in 2021?
Right now, all jobless benefits are taxable on federal returns in 2021. Yet taxes are not withheld automatically from jobless benefits. So if you want to have taxes withheld, you need to address that.
“Many people are surprised to learn that unemployment is taxable and they didn’t opt to withhold taxes,” said Kathy Pickering, chief tax officer at H&R Block.
Next year could prove to be even more confusing, too, if you’re expecting the tax rules on jobless benefits to be the same as they were on 2020 income tax returns.
A limited tax rule change, which went into law March 11, enabled single taxpayers to exclude up to $10,200 of unemployment benefits received in 2020 from taxable income on their federal returns – or as much as $20,400 for married couples filing jointly. (The maximum $20,400 exclusion on jobless benefits for 2020 for married filing jointly would only be available if both spouses had unemployment benefits of at least $10,200 each.)
But that tax break only applied to 2020. So, unless something changes in the months ahead, you’re on the hook for treating all unemployment compensation received in 2021 as taxable income.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said President Joe Biden has not proposed an exclusion of some jobless benefits from taxable income as was done retroactively for 2020.
But Luscombe noted it remains possible that Congress could enact another retroactive exclusion later this year.
No one knows, of course, whether the current tax rule will stay in place or if we’ll see another waiver.
If all those benefits remain taxable, though, you could be looking at a tax headache if you don’t make some adjustments.
Someone who is applying for unemployment compensation now could request that taxes be withheld from their benefits.
If you had taxes withheld on jobless benefits, the federal taxes are withheld at a 10% rate. On $10,000 in jobless benefits, for example, we’re talking about $1,000 in federal taxes withheld. That’s money that could go to cover what income taxes you’d owe – or possibly lead to a bigger federal income tax refund next year.
If you’re already collecting unemployment benefits – and did not withhold federal taxes – you can contact the state agency and see if taxes can be withheld from future benefits.
In Michigan, those receiving unemployment compensation are able to update their tax withholdings through their MiWAM account. They will need to go to Claimant Services, click on their active claim, then select Update Withholding, according to Lynda Robinson, a spokesperson for Michigan’s Unemployment Insurance Agency.
Do you have children ages 17 and younger?
Many people with children will be thrilled to spot extra cash in their bank accounts or to see a check in the mailbox beginning around July 15 as the Internal Revenue Service issues advance payments for the expanded Child Tax Credit.
Eligible families will receive up to $300 per month for each qualifying child ages 5 and younger. The monthly payout is up to $250 per month for each qualifying child ages 6 to 17. Your amount will be based on your income.
The American Rescue Plan, signed by the president March 11, increased the amount of the credit for many people and included children age 17, instead of stopping at 16.
The plan also requires the IRS to advance up to half of the expected credit in equal monthly installments from July through December. The rest of the money is available when tax returns are filed next year.
Eligible parents will receive up to $3,600 total for each child ages 5 and younger and up to $3,000 for each child ages 6 through 17. Until now, the credit was worth up to only $2,000 per child.
The IRS said it would calculate the payment amount based on the 2020 tax return, if that return has been filed and processed. If not, the IRS will instead determine the advance monthly payment amount using the 2019 return.
Those who qualify can use that money now to cover bills or other expenses. One goal is to help lift many children out of poverty.
But everyone isn’t likely to be happy next year when they file their income taxes. The reason? You’re receiving money up front that you might have received in a lump sum when you filed your tax return.
“This could result in a smaller tax refund when people go to file next spring,” said Pickering, chief tax officer at H&R Block.
Some families who experience life changes even could be issued more money in the upcoming advance payments than they’ll actually end up qualifying for when they complete their 2021 tax returns next year.
Some examples: Say your income increases and you’re no longer eligible for some or all of the child tax credit.
Or maybe one or more of the children you claimed for the Child Tax Credit in 2020 will not be claimed on your tax return for 2021. Maybe you have a divorce decree where each parent takes turns claiming the children every other year.
The monthly payment, in some cases, might be higher than you’d be qualified to get.
“It’s possible they may have to pay back some of the money, which would either be taken out of their tax refund or added to their tax liability,” Pickering said.
There are “safe harbor” amounts where you’re not required to repay up to $2,000 per qualifying child.
That’s the case if you are single and your income is below $40,000. For the head of household, the income needs to be below $50,000. And for married couples filing jointly, the income would need to be below $60,000.
A partial safe harbor exists for filers with income between: $40,000 and $80,000 if single; $50,000 and $100,000 for head of household; and $60,000 and $120,000 for married filing a joint return.
If your income exceeds these thresholds, Pickering noted, you will be responsible for repaying the full amount of any overpayment on your tax return.
The IRS is expected to launch a portal that would give taxpayers a way to “opt out” of the monthly advance payments for the Child Tax Credit.
If you’d choose to opt out of the advance payments, you’d instead receive the money when you claim the credit when filing a 2021 return next year, again if you qualify.
In the future, the plan calls for enabling individuals and families to visit IRS.gov and use the “Child Tax Credit Update Portal” to notify the IRS of changes in income, filing status, or number of qualifying children.
Families would be able to update their direct deposit information and make other changes to ensure they are receiving the right amount of money.
These portals, though, are not yet available. See the special Advance Child Tax Credit 2021 page at IRS.gov/childtaxcredit2021 for updates.
“If your family or income situation has changed in the past year, you’ll want to make updates in the IRS portal when it is released later this summer,” Pickering said.
Did you owe way more than expected this year?
Some taxpayers need to make estimated tax payments to avoid a surprise bill on the 2021 tax return. Others can make the necessary adjustments by changing their withholdings.
Luscombe noted that an estimated tax penalty could apply if you owe more than $1,000 on your 2021 tax return than you have paid in withholding or estimated taxes.
But he said a penalty will not apply if your withholding and estimated tax payments equal at least 100% of the tax shown on your 2020 tax return (or 110% if your adjusted gross income is in excess of $150,000 or $75,000 if married filing separately).
“One advantage of increasing withholding over increasing estimated tax payments is that withholding is assumed to have been paid equally through the year while the IRS could still assert a penalty if estimated tax payments were not made in four equal installments through the year, and we are already past the first installment date, due April 15, 2021,” Luscombe said.
The next estimated tax payment is due June 15.
The IRS has a special online tool called the IRS Tax Withholding Estimator that can help employees, retirees and self-employed individuals figure out if they need to make changes to their withholdings.
It’s a step-by-step process and offers recommendations for how to aim for a desired refund next year.
Taxpayers who need to make a change must check with their employer to update their withholding or submit a new Form W-4, Employee’s Withholding Certificate.
The IRS notes that individuals could want to increase withholding if they hold more than one job at a time or have income from sources not subject to withholding.
Or you might want to decrease your withholding if you want a smaller refund next year.
You might need to review your withholding if you plan to get married in 2021. Or maybe you have a higher income and a more complex tax return. Or you had an extra-large tax bill this year.
If you make adjustments on your W-4, take extra care to double-check how much money is being withheld from your paycheck to make sure the changes work for you.
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