Big Life Changes Could Spell Big Shifts in 2022 Tax Outcomes

As tens of millions of People put together to file their annual federal earnings tax returns, a brand new survey from NerdWallet finds that way of life modifications, new tax legal guidelines and misconceptions may throw them for a loop.

Incomes have gone up and down, folks have moved from state to state, they’ve collected unemployment and youngster tax credit score funds, began freelancing and begun investing, in keeping with the survey carried out on-line by The Harris Ballot from Dec. 13-15, 2021. Not solely can these modifications have an effect on the complexity of filers’ returns, however they might affect their backside strains.

“The final yr has been a time of transition for a lot of People. Loads of these modifications, together with shifting to a unique state, leaving a job, or getting married, can have a big effect in your taxes,” says NerdWallet private finance knowledgeable Kimberly Palmer. “Understanding these particulars upfront could make it simpler to navigate tax return season, and aid you keep away from potential penalties.”

Word: All through the report, “filers” refers to People in our survey who stated they plan on submitting or did file a federal tax return for the tax yr specified.

Anticipated tax payments are larger than anticipated refunds. Filers anticipating to owe once they file a 2021 federal return anticipate a $3,479 invoice, on common. Filers anticipating a refund count on $2,221. 

Taxpayers take motion to cut back legal responsibility. Practically three-fourths (72%) of 2021 filers stated they’d taken or would take steps to reduce their tax invoice. That is up from 65% amongst 2020 filers.

Recipients are confused about youngster tax credit score funds. Greater than 2 in 5 (44%) of People who acquired advance youngster tax credit score funds in 2021 imagine these funds are taxable, in keeping with the survey. Whereas these funds gained’t be taxed, filers should account for them. If filers acquired greater than they had been due, they might should return the overpayment. 

Adjustments in quantities and sources of earnings abound. One-third (33%) of People say their family earnings decreased, 26% stated their family earnings elevated, 11% began freelancing or doing gig work and 12% report receiving unemployment advantages in 2021. Any one in every of these modifications may affect the end result of a taxpayer’s return. 

About half (51%) of People submitting 2021 federal earnings tax returns this yr expect a refund. That’s on par with findings prior to now two years (51% for 2019 and 50% for 2020). They usually’re anticipating to obtain refunds which can be roughly comparable in dimension to earlier years’ expectations — $2,221 on common, in comparison with $2,207 for 2019 and $2,032 for 2020, in keeping with the survey.

When requested how they plan to make use of their refund, 42% of these anticipating one stated they’ll put cash into their financial savings. This marks the third yr we’ve requested this query, and the third yr financial savings was the highest vacation spot for refunds.

Practically one-fourth (23%) of these submitting a 2021 return count on to owe further federal taxes — $3,479, on common. That’s up from $2,781 amongst 2020 filers anticipating a invoice, and $2,667 amongst these 2019 filers. 

Practically three-fourths (72%) of individuals planning to file a 2021 federal tax return say they took steps or will take steps to doubtlessly scale back their 2021 federal tax invoice or scale back what they owe total. That is up from 65% the yr prior.

Millennial filers usually tend to take such steps (82%) in comparison with 75% of Gen Z, 72% of Gen X and 65% of child boomers.

However even those that didn’t take intentional steps to cut back their tax burden could discover this yr’s tax final result completely different, on account of modifications of their private lives and people led to by the pandemic financial system.

One factor working in filers’ favor: changes made by the IRS to counteract the consequences of decades-high inflation. Solely 37% of People know that earnings tax brackets are generally adjusted to account for inflation, in keeping with the survey. The IRS usually makes tax bracket changes and different modifications to account for inflation yearly.

Taxpayers with youngsters and below a sure earnings threshold can qualify for a youngster tax credit score, which reduces their tax invoice greenback for greenback. In 2021, the kid tax credit score was expanded from $2,000 per youngster to $3,600. And for the primary time ever, certified taxpayers may obtain a part of the credit score upfront, by way of month-to-month funds that started in July 2021.

The IRS despatched out billions of {dollars} in funds, however those that acquired them might not be absolutely conscious of their affect when it comes time to file.

Of those that acquired superior youngster tax credit score funds in 2021, 44% imagine these funds are taxable, in keeping with the survey. This isn’t the case, however recipients could should “settle up” when it comes time to file. The IRS primarily based these funds on 2020 tax return information, so a 2021 change in earnings or the variety of qualifying dependents, for instance, may have resulted in an overpayment.

“Whereas receiving the kid tax credit score funds upfront was a much-needed lifeline for a lot of households, it might probably additionally make submitting taxes for 2021 a bit extra complicated. Recipients might want to account for these funds and, in the event that they acquired greater than they had been due, pay it again,” Palmer says.

Taxpayer tip: Taxpayers eligible for a kid tax credit score might want to reconcile what they’re eligible for with any quantities they’ve already acquired all through 2021. The advance funds had been designed to account for half of your credit score for the yr. Those that acquired an advance cost ought to have acquired a letter from the IRS containing useful info to make use of at submitting time, together with the overall quantity that was paid out. If you happen to’ve misplaced the letter or didn’t obtain it, entry your cost info on the Little one Tax Credit score Replace Portal.

Your earnings has a dramatic affect in your tax burden. Once you change jobs, pursue self-employment or acquire unemployment, the end result of your return can change, too.

One-third (33%) of People say their family earnings decreased in 2021 — 22% cited the pandemic’s impact and 11% cited unrelated occasions as causes. However about one-fourth (26%) say their earnings elevated. These modifications may place filers in a unique tax bracket, make them eligible for extra credit or lead to underpayment and a subsequent tax invoice.

As well as, many People took on gig work — 11% began freelance work, in keeping with the survey. In freelance conditions, taxes usually aren’t withheld from pay, which suggests staff new to freelancing who didn’t pay estimated taxes themselves all year long could also be shocked at what they owe.

Regardless of document low unemployment, 12% of People report receiving unemployment advantages in some unspecified time in the future throughout 2021, and plenty of could also be unclear on learn how to deal with them come tax time. In truth, 15% of those that acquired unemployment advantages don’t imagine these advantages are taxable, in keeping with the survey.

Traditionally, all unemployment has been taxable. Nonetheless, the American Rescue Plan Act of 2021 modified how that tax works. The primary $10,200 in advantages for folks with adjusted gross incomes of $150,000 or much less isn’t taxable. As of Nov. 1, 2021, the IRS issued some $14.4 billion in refunds on unemployment taxes paid earlier than the rescue plan was enacted.

Taxpayer tip: If you happen to’re not utilizing knowledgeable tax preparer, tax software program may also help make sure you’re submitting an correct return, irrespective of how your earnings modified. IRS Free File permits taxpayers with incomes of $73,000 and under to file their federal return on-line utilizing free software program. Navigating to the IRS Free File web site will join you to corporations providing this service. If you happen to don’t qualify without spending a dime on-line submitting, a number of tax software program corporations supply packages at quite a lot of worth factors, relying on the complexity of your return.

An estimated 12.9 million People — or 5% — report shifting from one state to a different in 2021, in keeping with the survey. Shifting complicates every thing, together with your earnings taxes. Generally, when you had been a resident and earned earnings in a state, it’s essential to file there. So when you had been a resident of and earned earnings in two states, which means submitting two state earnings tax returns.

About 1 in 10 (11%) People imagine you aren’t more likely to be accountable for submitting in two states when you transfer to at least one mid-year, in keeping with the survey.

Taxpayer tip: State tax legal guidelines (and the way a state defines residency) range, typically extensively. Tax software program will stroll you thru a course of to find out the place it’s good to file and pay taxes. Nonetheless, when you’re unsure, contact the state’s division of income for clarification. Failing to file a state return when it’s required may end up in hefty charges, penalties and curiosity.

Practically one-third (31%) of 2021 filers made or deliberate to make charitable contributions to cut back their federal tax invoice, in keeping with the survey. And 13% of People say they began contributing or elevated contributions to charities in 2021.

Earlier than 2021, solely filers who itemized may deduct donations to charities. Now, nevertheless, even those that take the usual deduction can write off as much as $300, or as much as $600 in the event that they’re married and submitting collectively.

Taxpayer tip: To assert charitable donations as a deduction, the recipient of your present have to be authorized by the IRS. Use its Tax Exempt Group Search instrument to double-check earlier than submitting. If you happen to hope to deduct greater than the $300 or $600 restrict, you’ll have to itemize your deductions, and simply how a lot is deductible varies by contribution sort and the group.

“Getting accustomed to how completely different life modifications may doubtlessly affect your tax return will make it simpler to file your taxes on time and keep away from penalties for errors or underpayments,” Palmer says. “You don’t should be a tax regulation knowledgeable, however reviewing the fundamental ideas of federal and state earnings taxes, deductions and tax credit may also help you keep away from pricey surprises later.”

This survey was carried out on-line inside the U.S. by The Harris Ballot on behalf of NerdWallet from Dec. 13-15, 2021, amongst 2,051 U.S. adults ages 18 and older, amongst whom 1,644 will file a 2021 federal tax return. This on-line survey isn’t primarily based on a chance pattern and due to this fact no estimate of theoretical sampling error may be calculated. For full survey methodology, together with weighting variables and subgroup pattern sizes, please contact Sarah Borland at [email protected].

The variety of People who moved from one state to a different in 2021 calculated utilizing the U.S. Census Bureau’s grownup inhabitants estimate as of July 1, 2021, the latest out there.

NerdWallet defines generations as Technology Z, ages 18-25; millennials, ages 26-41; Technology X, ages 42-57; and child boomers, ages 58-76.