Yes, it’s that time again. “April is the cruelest month” is part of a line in a famous poem by T.S. Eliot, and many people working on their income tax probably would agree. However, CPAs and other experts warn all filers of income tax returns not to wait until April. Over the years, the income tax has become more complex, reflecting changes in society and the economy. Whether you do your own taxes or utilize professional help, below are some tips that could help you and hopefully make April not such a cruel month.
“Accuracy is more important than ever,” notes Eugene L. Esares, a Connecticut-based CPA who serves individuals and small businesses. “Taxpayers receiving the third federal Economic Impact Payment in 2021, and/or the Advanced Child Credit will need the precise amounts received in 2021 for these two programs in order to receive any additional credit due them or to avoid undue delay in the IRS processing of their returns and possible refunds.
“The IRS reports that it still has 35 million tax returns that have not been processed for 2020 due to the need for manual review. Accuracy-related delays may cause taxpayers to wait months for refunds that may have otherwise been available in two weeks or less.”
The Connecticut Society of CPAs has produced some tips for filing your taxes:
- Make your taxes a priority right now. Before you know it, the April 18, 2022 deadline will be here. It is important to be organized to ensure a smooth process.
- Gather income documents, including W-2 forms, 1099 forms (if appropriate), alimony received, sale information, and miscellaneous income.
- Gather income adjustment documents, including 1098 forms for student loans, tuition and mortgage interest, IRA contributions, energy-efficient home improvement receipts, Medical Savings Accounts contributions, self-employed health insurance payments, and pension plans, moving expenses, and alimony paid.
- Gather itemized deductions (if applicable), including childcare costs, education costs, adoption costs, investment interest expenses, charitable donations, and medical and dental expenses.
- Record all cash donations to public charities in 2021 as they are 100% deductible if you itemize deductions. Non-cash gifts to public charities, as well as gifts to donor-advised funds and private foundations, are also deductible but are subject to certain AGI limits. (If you do not itemize, individuals can deduct $300 for cash charitable contributions on top of their standard deduction; a married couple can deduct up to $600 on a joint return, notes Kathleen Cassidy, JD, who follows tax and estate planning issues at the Barnum Financial Group.)
- Gather documentation on state and local taxes paid, including personal property taxes, real estate taxes, state and local income taxes, and sales tax. vehicle license fees and estimated taxes paid for self-employed these are deductible, up to a $10,000 cap. In some cases, vehicle registration fees are deductible too. Also, have documentation ready about any estimated taxes you paid on self-employment income.
- Save all letters and/or correspondence sent from the IRS outlining your Child Tax Credit and stimulus payments. You may have one letter or several letters outlining the payments you received in 2021. For married couples who were eligible for the Child Tax Credit, each spouse will receive an individual letter documenting half of the advance payments made. The amounts from the two letters must be combined on the tax return if the couple files jointly. The Child Tax Letter is Form #6419 and the Stimulus Letter is Form #6475. Your accountant may ask you to provide proof of deposit if there are discrepancies. You can also check amounts received on IRS.gov.
- Self-employed individual contributions and IRA contributions can be made for 2021 up until April 15. For 2022, remember to maximize your IRA, 401k, 403b, or other company contributions as you plan ahead.
- Consider “bunching” your deductions in preparation for 2022. Certain expenses, such as unreimbursed medical expenses, are only deductible if they exceed a certain percentage of your Adjusted Gross Income. So, if you have the ability to bunch medical expenses in a single year, you may have a better chance of deducting them. Also, since the standard deduction was increased in 2017, charitable deductions and other familiar tax write-offs are often moot. But you may be able to take advantage of those deductions by bundling them in certain years and then taking the standard deduction in other years.
If you can’t file by April 18, be sure to file an extension with your tax advisor. An extension is an extension of time to file, not pay. The extended file deadline is October 17, 2022.