The 2022 tax season is here, and it is time to look for innovative ways to get a fat tax refund. The Internal Revenue Service (IRS) is all set to accept 2021 tax returns from January 24 onwards. You need to make sure you get the process right to get a bigger IRS tax refund that could come in handy during the late winter or early spring.
When you gather your documents and prepare for filing, make sure you take advantage of the five tips we discuss here in this article.
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1. Don’t Forget the Child Tax Credit Paperwork
The American Rescue Plan boosted the child tax credit payout in 2021 from $2,000 to $3,600 for children under the age of 6, and up to $3,000 for children aged 6 to 17.
Half of the money was paid in monthly installments by the IRS, and the rest will be included in the tax refund.
The IRS will issue paperwork, Letter 6419, to each family later this month and into January, detailing how much it has already paid each household.
Anyone with children aged 17 and under is likely entitled to receive the child tax credit, except for the wealthiest families.
Don’t overlook this claim as it could help you get an IRS tax refund bigger than you expect. The advanced payments were computed depending on your income and family situation in 2020 or 2019.
However, the year’s final computation will be based on your information from 2021, which could affect how much you’re eligible for. If you had another kid in 2021, for example, you may be entitled to more than your forward payments indicate.
2. Take Advantage of the Child and Dependent Tax Credit Increase
The Child and Dependent Care Credit amounts have been temporarily increased for those who are employed or enrolled in school and are responsible for the care of a child under 13 or another family member who is not mentally or physically capable of looking after themselves.
Legislators increased the Child and Dependent Care Credit’s potential payments during this year’s tax season, which is separate from the Child Tax Credit.
To allow parents to work, the credit is designed to reduce the expense of childcare. Depending on the circumstances, it may also apply to adult dependent care.
The IRS will cover up to half of a qualified household’s work-related care expenditures in the upcoming tax season. The credit can be up to $4,000 for a single kid and up to $8,000 for families with two or more children.
This is an increase from the maximum 2020 credit of $1,050 for one qualified child/adult dependent and $2,100 for two or more.
Once a person’s adjusted gross income reaches $125,000, the IRS will eventually stop paying half of the amount. Once you earn $438,000 or more in adjusted gross income, the phase-out is over. The IRS covered 35% of the cost of work-related costs last year.
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3. Claim Your Recovery Rebate Credit
This is for those eligible for the stimulus checks under the American Rescue Plan initiated during the beginning of the COVID-19 pandemic. The letters detailing the stimulus check payments will be rolled out by the IRS in late January.
A missed-out stimulus check refund can be claimed on the forthcoming tax return in a similar manner to how refunds for the first and second round of 2020 checks were requested earlier this year.
Economic Impact Payments (EIPs), or Recovery Rebate Credits, will be incorporated into the return for those owed stimulus funds.
The advance Child Tax Credit payments are vastly different from the stimulus payout. Taxpayers who earn more over the $75,000 or $150,000 threshold for full payment will not have to refund the payments if the IRS overpaid them.
4. File Early to Assess all Deductions and Credits
One of the best ways to make the most of your IRS tax refund is to file your claims early. This will provide you with enough time to assess all the deductions and credits to be included.
There are so many details in a tax filing that could be out of your control. When taxpayers prepare their filing early, it could provide them with enough time to carefully bring down their taxable income and increase their IRS tax refund.
Most importantly, keep note of every correspondence from the IRS since some letters will provide the information needed to appropriately complete a 2021 return that avoids objections and delays.
5. Reduce Taxable Income with Contributions to Retirement Funds
Your contributions to traditional Individual Retirement Accounts (IRAs) are tax-deductible, subject to certain rules from the IRS. That includes whether the person or their spouse has a company-sponsored retirement plan. The net worth of a family is another factor to consider.
Anyone earning up to $66,000 in modified adjusted gross income can deduct the full amount of their taxable compensation up to their annual contribution maximum, regardless of whether their employer has a retirement plan.
The deduction gradually diminishes and eventually disappears for anyone earning over $76,000 per year.
You have until April 15, 2022, to contribute to your IRA for this year.
6. Analyze Your Investment Portfolio for Capital Losses
The volatility you face in the stock market could also help you reduce your taxable income and give you a bigger IRS tax refund in 2022.
While this is no replacement for the valuable capital gains you receive in the market, it could help mitigate some inevitable losses sustained in the market.
While capital gains are subject to a lower tax rate, IRS also offers a deduction for losses that may be used to offset the profits. The IRS says individuals can deduct up to $3,000 in losses from their income if capital losses outweigh capital gains in a given year.
As per IRS rules, if the net capital loss exceeds $3,000, the rest can be carried forward to next year.
Now is an excellent moment to review your investment portfolio to determine whether any holdings are underperforming and whether you have any unrealized losses you may accept.
7. Take Advantage of Earned Income Tax Credit
If you earn less than $25,000 a year and have no children, you may be able to claim more of the Earned Income Tax Credit (EITC) in 2021 than you did in the previous filing.
IRS also increased the maximum credit available to $1,502 under the American Rescue Plan.
If you’re married and filing jointly, your taxable income for 2021 must be less than $21,430 ($27,380 if single) to take advantage of earned income tax credit.
In addition, the amount of investment income you may earn on top of your salary is included here. You may still claim the credit, which has been raised to $10,000 for all EITC beneficiaries permanently.
For the first time, childless employees under the age of 19 and those above the age of 65 are eligible for the credit.
If you have qualifying children, and your yearly income is $57,414 or less, you may be eligible for the Earned Income Tax Credit (EITC). Because of this, they may be eligible for a maximum tax credit of $6,728.
Late Winter Cash Flow with a Big IRS Tax Refund
If you file your tax returns for 2022 before the April 15th deadline, you are most likely to receive your IRS tax refund by late winter or early spring. Before interest rates rise, a tax return might be used to pay off credit card debts. These simple tips could help you achieve all that.
You could also plan various other expenses based on the refund you are likely to get. While many things in taxes could be out of your control, you could easily control your inputs to make sure you get a good refund amount.
Happy filing!
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