Doing your taxes this holiday weekend? As of April 8, the Internal Revenue Service had processed nearly 100 million individual tax returns for tax year 2021 and issued more than 70 million refunds. The average refund: $3,175.
Here are some last-minute tips on how to get a bigger tax refund, including some special tax breaks that are new or expanded and good for only 2021 tax year returns due this year—on Monday, April 18, 2022 for most taxpayers. Taxpayers in Maine and Massachusetts have until April 19 because of Patriots Day. Taxpayers in certain disaster areas have until May 16 or June 15. And anyone can file on extension through October 17—just be sure to estimate your tax liability and pay any amount due by the April 18 filing deadline to avoid penalties and interest.
Grab the special charitable contribution tax break. For folks who take the standard deduction—that’s nine out of 10 taxpayers—there’s a special tax break for making cash gifts to charity for 2021. Ordinarily, taxpayers can take charitable donation deduction only if they itemize deductions. But under this special law, individuals who don’t itemize can deduct up to $300 and a married couple filing jointly can deduct up to $600 for charitable donations made by cash, check or credit card. The deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations. So scan your 2021 credit card statements. If you made monthly donations to the ASPCA, for example, or if you made a one-time donation in memory of a loved one who passed away, those donations count—up to the $300/$600 limit.
Max out retirement and healthcare saving accounts. How does saving money get you a bigger refund? Contributions to pre-tax accounts reduce your taxable income. You can contribute to an Individual Retirement Account and/or a Health Savings Account and the contribution counts for the prior tax year up until tax day. Individuals can contribute up to $6,000 to an IRA—plus an additional $1,000 if you’re 50 or older—for the 2021 tax year. the contribution limits for HSAs, available if you had a high-deductible health insurance plan, are $3,600 for individual coverage and $7,200 for family coverage, plus $1,000 extra if you’re 55 or older. For lower-income taxpayers, another incentive to save for retirement is the $1,000 Saver’s Credit. A credit reduces taxes dollar for dollar, making it more valuable than a deduction.
Got kids? Check out the enhanced child and dependent care credit. If you paid a day care center or other “qualifying” care provider to watch your kids—under age 13—so you and/or your spouse could work, you may be eligible to claim an enhanced child and dependent care credit. This is different than the Advanced Child Tax Credit that was doled out in monthly payments in the second half of the year to most families with kids—and is trued up on your 2021 tax return. This is also different than the dependent care flexible spending account benefit you might have through work—if you have one of these accounts, use that up first, then apply any extra child care costs to claim the credit.
For 2021, Congress sweetened the child and dependent care credit: a maximum credit of $4,000 for one child receiving care, and $8,000 for two or more. Taxpayers with adjusted gross income up to $125,000 are eligible for the full credit, which decreases until it phases out at $438,000 of adjusted gross income. The 2021 changes also made the credit refundable, which means that even if you don’t owe any tax, the credit will be paid to you as a refund. The National Taxpayer Advocate has more details on the changes to this important tax credit for families. Note it applies not just to kids, but other dependents such as elderly parents.
More taxpayers qualify for the Earned Income Tax Credit. Congress made permanent changes—and temporary changes for 2021—to the EITC, which helps low- to moderate-income taxpayers. An example of a permanent change: The maximum amount of investment income like interest and dividends that a taxpayer can earn and still be eligible for the credit was increased from $3,650 to $10,000. A temporary change for 2021: More taxpayers are eligible, including those over 65 without children and taxpayers as young as 19. And you can use your 2019 income to qualify if it results in a larger tax credit. The National Taxpayer Advocate has tips on how to avoid errors when claiming the EITC and what to do in the case of an EITC audit.
Further Reading:
Tax Day 2022: 5 Steps To A Faster Tax Refund
IRS: We Apologize, Your Tax Refund Is Delayed