It’s tax time! Before you file your taxes, make sure you’ve checked these essential six items off your list, ensuring your return is complete and accurate.
1. File on Time
The easiest thing you can do to make tax filing go smoothly is simply filing on time. The standard filing deadline is April 15th each year, but the 2021 tax year deadline falls on April 18th, 2022, due to the Emancipation Day holiday. If you need to file an extension, you can extend your deadline to October 17th, 2022. It isn’t automatic, though. Make sure you properly request the extension if you need one.
Filing an extension may give you more time to file your return, but it won’t lengthen the clock for estimated payments. If you owe the IRS money in April, be sure you pay it in April, so you don’t get stuck with late fees and penalties.
2. Increased Tax Brackets for 2021 and 2022
Federal income tax rates are the same for 2021 and 2022, and those are:
However, the income levels where you enter the next higher bracket have changed due to inflation. Your filing status (single, married filing jointly, head of household, etc.) determines the income level for each bracket, so be sure to reference the correct table for your filing status.
3. Standard Deduction
For most people, the most exciting part of tax time is figuring out what they can deduct from their income before calculating their final tax bill.
You can either take the standard deduction or the total of your itemized deductions, whichever is more. The vast majority of filers—about 90%— will end up taking the standard deduction. Again, that amount depends on your filing status.
- $12,550 for single or married filing separate
- $25,100 for married jointly
- $18,800 for the head of household
4. Should You Itemize?
If you can deduct the greater of your standard deduction or itemized deductions, then, of course, you’ll want to know what your itemized deductions are. Popular tax deductions include:
- Healthcare expenses. Although healthcare expenses are a common deduction, only your healthcare expenses in excess of 7.5% of your adjusted gross income (AGI) can be counted as an itemized deduction. That may seem technical, so we’ll give a simple example with round numbers. Suppose your AGI is $100,000, and you have $10,000 in qualified medical expenses. Since 7.5% of $100,000 is $7,500, you can itemize $2,500 in excess medical expenses.
- Charitable contributions. To maximize the value of your donations, consider ways to take full advantage of the tax benefits of doing so. Consider giving more significant gifts every few years rather than giving smaller gifts each year. Bunching your donations will take advantage of the higher itemized deduction. You can use a donor-advised fund, which is a prevalent tax reduction strategy for higher-income earners. Also, if you have appreciated assets, you can donate them directly without having to incur the capital gain tax liability you would owe if you sold them first and then donated the cash.
- Mortgage interest. The Tax Cuts and Jobs Act decreased the mortgage interest deduction from $1 million to $750,000. This means any home purchased after December 16, 2017, abides by the lower limit. You may also be able to deduct private mortgage insurance (PMI) or other insurance premiums if it applies. Keep in mind that you can no longer take a deduction for the interest paid on a home equity loan if you don’t use it to substantially improve your house.
- State and local taxes. You can deduct up to $10,000 in SALT taxes, and typical examples include property taxes, income, and sales tax.
You may have other unique tax deductions available depending on how many qualified dependents you have, if you’re self-employed, own a small business, etc.
5. Contribute Extra to Your Retirement Accounts
You also have time to make last-minute contributions to retirement accounts and your HSA. You have until your tax filing deadline to contribute for the previous calendar year, and this is a great time to add additional savings and reduce your overall tax liability.
Here’s a quick reminder of the annual contribution limits for your 2021 accounts:
- HSA: $3,600 for self-only coverage and $7,000 for family coverage with an extra $1,000 in catch-up contributions when 55 or older.
- IRA: $6,000 with an extra $1,000 in catch-up contributions when 50 or older.
6. Organize Your Documents and Set Up Direct Deposit
Getting organized before you file will help ensure you don’t miss something. Gather your income reporting documents such as W-2s and 1099s. Then, locate verification for your itemized deductions and double-check the amounts.
Lastly, set up a direct deposit to expedite your refund. Most of the time, you’ll receive direct deposit weeks, if not months, sooner than having the IRS mail you a paper check. This may be especially important this year, with the IRS already announcing that we should expect a slow tax season.
7. Prepare for a Refund
Are you expecting a tax refund? First, be sure to file early, as the IRS already anticipates massive delays this filing season. One way to speed up the filing process is to e-file online, whether you’re filing your own taxes, working with a tax professional, or using a tax software. Doing so will ensure the IRS gets your documents faster and allows you to correct any errors in a timely fashion.
You can also set up direct deposit so the refund check can funnel directly into your bank account.
Tax season can sometimes be stressful. Our BW team hopes this list helps you prepare and submit your tax filings. If you have any questions about your financial accounts or donor activities related to taxes, just reach out to us!