Tax filing is almost universally dreaded — and this year is poised to be even more challenging than usual. The IRS, shorthanded and still working through a backlog of last year’s returns, has warned taxpayers to be extra cautious in filing to avoid delays. In addition, pandemic-era changes to the tax code will translate into surprises for many taxpayers.
Tax returns for the 2021 tax year are due for most filers by April 18, 2022. And tax experts across the state recommend starting early, paying close attention to accuracy, and filing electronically to get the best results this year.
“Even though we did not get any major tax legislation this year, there are still some changes that affect 2021 tax returns,” says Rachel Taylor, CPA, shareholder at JamisonMoneyFarmer PC in Tuscaloosa.
Here’s a look at some of the most important items to consider when filing taxes this year.
Individual Tax Reminders
Most of the changes for 2022 affect individual taxes rather than business taxes. The most notable changes will be related to government payments sent to many households over the past year, such as the Child Tax Credit advance payments and Economic Impact Payments.
“The Child Tax Credit benefits working families by allowing them to claim a credit per qualifying child,” says Lyvonnia Poppell, CPA, principal and tax line of business leader at Montgomery-based Jackson Thornton CPAs. During 2021, the American Rescue Plan increased the amount families could claim from $2,000 per child to $3,600 per child under age six and $3,000 for children ages six to 16.
In addition, “the credit was made fully refundable, meaning the amount is refunded to the taxpayer if the credit is more than the taxpayer’s tax liability,” Poppell says. “And a portion of the Child Tax Credit was advanced to taxpayers beginning in July 2021.”
Families were able to receive up to half of their Child Tax Credit in advance payments during the second half of 2021 — and those who received the advance payments will only be able to take half the credit when they file taxes this year. The IRS mailed letters to households that received advance Child Tax Credits in December 2021 and January 2022. To file returns efficiently, affected taxpayers will need their Letter 6419, Advance Child Tax Credit Reconciliation, to include the correct amount on their returns.
Taxpayers who received a third Economic Impact Payment in 2021 should have received a Letter 6475, Your Third Economic Impact Payment, in late January. These letters provide the amounts that the IRS paid to the taxpayer. “Individuals who did not receive the full amount of the third Economic Impact Payment may be eligible for an additional Recovery Rebate Credit,” Taylor says. “Most importantly for taxpayers who received the Recovery Tax Credit or the Advance Child Tax Credit payments, confirm those amounts by reviewing your bank accounts and personal records.”
In addition to the pandemic-era payouts that may affect your tax returns, there is an increase in the standard deduction for the 2021 tax year, says William Dow, CPA and member at Birmingham-based Warren Averett. For taxpayers who choose not to itemize deductions, the standard deduction rose to $12,550 for individual filers and $25,100 for married couples filing jointly. People age 65 and older can add an extra $1,350 per person for married filers or $1,700 for single filers.
As a result of the pandemic, the IRS made it easier to deduct charitable contributions. In 2020, the IRS allowed a $300 charitable contribution deduction per tax return on top of the standard deduction; previously, taxpayers were required to itemize deductions in order to take a charitable deduction. For 2021, some taxpayers can deduct even more for charitable contributions: The $300 charitable deduction is per person, so individuals who are married and file jointly with the standard deduction can deduct up to $600 for charitable contributions.
People who choose to itemize deductions can take even more. Prior to the pandemic, taxpayers could deduct charitable contributions in an amount equal to up to 60% of their income. In 2020, the IRS raised the limit to 100%, and this change was extended through 2021. So this year, taxpayers can deduct an amount equal to 100% of their income for charitable deductions, if they choose to itemize.
Business Tax Reminders
The past year did not include any significant changes in the tax law for businesses, but there are a few small changes and some important upcoming shifts to remember.
For example, “the COVID-19 pandemic has caused an increase in remote workers, so businesses should review in which states their remote workers are located,” Dow says. “They could have tax filing responsibilities in those states.”
In addition, businesses that are classified as partnerships or S-corporations now have an option to change the way they manage pass-through income, and for some owners, the new option will help reduce their personal taxes. Alabama (along with many other states) has passed a law allowing for a Pass-through Entity Election for S corporations and partnerships.
“The election allows the entity to pay and take a deduction for state income taxes related to the pass-through entity’s income,” Poppell says. “The state tax paid is passed through to the owners as a credit for taxes paid on their individual state returns. On the owner’s federal individual return, the state tax from the entity is not included in the state tax deduction reported as an itemized deduction, which is subject to a $10,000 limitation. Most owners will see a tax savings of 1% to 2% of the entity’s income.”
However, keep in mind that making this election isn’t the best choice for all pass-through entities, and depends on the tax liabilities of the owners. “Generally, this election is best suited for owners who are subject to the federal limitation on the deductibility of state and local taxes,” Taylor says. “Note that the election must be made by the due date of the return for the tax year for which the entity chooses to make the election.”
Also, business owners with employees should consider the employee retention tax credit created under the CARES Act. They may be eligible to receive a credit for wages paid between March 12, 2020, and September 30, 2021, Taylor says. To qualify, employers must have experienced a significant decline in gross receipts or fully or partially suspended operation during 2020. Employers who think they have eligible wages should contact their tax advisor.
Looking ahead, business leaders should be aware that the limitation on the immediate write off of qualifying assets, also known as Section 179 expenses, has increased. “The 100% write-off of eligible fixed asset purchases ends December 31, 2022,” Poppell says. “For 2023–2026, the write-off percentages will decline to 80%, 60%, 40% and 20% respectively.”
As a result, “businesses should evaluate their capital needs to determine if it makes sense to accelerate purchases into 2022,” Dow explains. “Also, the deduction of qualifying meals and entertainment expenses remains at 100% for 2022 but reverts to 50% next year.”
Nancy Mann Jackson is a Madison-based freelance contributor to Business Alabama.
This article appeared in the April 2022 issue of Business Alabama.
