Don’t be worried about tax season—be informed.
It seems we all very quickly went from wishing our friends a happy New Year to frantically asking if they had adjusted their withholdings in 2021, and if they were going to owe money come tax time.
A lot has changed over the past two years both due to the pandemic and typical life changes. People have moved, switched jobs or careers, had babies – and those changes should be reflected on the W-4 form you file with your employer. Your withholding is the amount of money you pay directly to the IRS out of your paycheck. Most people hope that they’ve elected to pay just enough (and won’t owe anything) or that they’ve had too much withheld and they can look forward to a refund. But generally no one (no one that I know, anyway) wants to wind up owing money come April 18. And unfortunately, if you didn’t make that change to your W-4 in 2021, you may find yourself dipping into your wallet for Uncle Sam in a few weeks.
Of course while adjusting your withholding can help lessen the blow of the tax changes, it’s not a cure-all. If you haven’t already sat down with your accountant to talk about how new laws may impact you, get that appointment booked now. Some of the biggest changes include:
- The standard deduction has changed. This year it’s $12,550 for single filers, $18,800 for heads of household and $25,100 for people married filing jointly. As in years past, you can still choose to take the standard deduction or itemize. To see where you’ll fall, check out this interactive calculator.
- Folks with medical bills that exceed 7.5% of their annual income can deduct those expenses (In years past, the bills had to exceed 10%.) Just note, it still has to make sense to itemize overall, which means you’ve got to be over the standard deduction.
- Child exemption/tax credit changes. For the 2021 tax year, the Child Tax Credit expanded as part of the American Rescue Plan. The credit increased from $2,000 per-child to $3,600 for children ages 5 and under and $3,000 for children ages 6 to 17. It’s important to note that this amount phases out to $2,000 per child depending on your income. If you received advance Child Tax Credit payments, you will need to report the total received when you file your taxes. You should have received Letter 6419 from the IRS in January.
- Remember that Economic Impact Payment you received from the government in 2021? This isn’t considered taxable income, so do not report it as such on your 2021 federal income tax return.
There is still time to take steps to reduce your tax burden before April 18. You can get a tax deduction of up to $6,000 (and lower your 2021 taxable income) when you make a deductible IRA contribution — just make sure your contribution is earmarked for the 2021 tax year.
Lastly, and perhaps most importantly, NOW is the time to adjust your withholding for 2022 if you weren’t happy with this year’s outcome. It’s easy. Go to HR, tell them that you want to adjust your withholding on your W-4. They’ll give you a new form, and you can fill it out appropriately, based on what the IRS’s handy withholding calculator (and/or your accountant) recommends for your situation. Seriously, don’t wait until this time next year to freak out about this all over again—simply being prepared is more than half the battle.
MORE ON HERMONEY:
- 5 Questions You Must Ask Any Financial Planner Before Working With Them
- 10 Steps For A Successful Mid-Year Financial Check-Up
- How To Curb Financial Anxiety
- How To Treat Yourself When You’ve Hit A Financial Milestone
SUBSCRIBE: Own your money, own your life. Subscribe to HerMoney to get the latest money news and tips!