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Changes and Challenges for Tax Season 2021 - Here’s What You Need to Know

Tax season is never fun. Between the lingering economic impact of COVID-19, and the changes that come along with a new administration in the White House, this year could be even more challenging than usual.

Thankfully, a little bit of preparation goes a long way for filing your taxes. Whether you’re still working or happily retired, you want to minimize your tax burden. We’ll cover some of the changes for 2021 and what to expect after filing.

Do You Need to File Taxes?

Retirement means the end of working, but not necessarily paying taxes. There are two situations that allow you to avoid filing:

  • Your only income is Social Security
  • Your taxable income, aside from Social Security, is less than the standard deduction

Otherwise, you'll probably still need to file, but you might not owe. Aside from standard or itemized deductions, the Credit for the Elderly or the Disabled can be a valuable tax break for retirees.

What to Know Before Filing Your Taxes

With around 7,000 pages, the U.S. tax code is complicated, to say the least. And there are numerous changes every year. Most of them are either routinesuch as adjustments to standard deductions and tax bracketsor inconsequential for the average person.

However, there are some key changes and issues to be aware of this year, especially for seniors and retirees.

Notices for Stimulus Payments

Getting letters from the IRS is often a cause for concern, but it doesn’t always mean you’re in trouble. They’re sending notices to people who were eligible for various forms of stimulus payments in 2021 to ensure they got the full amount they were entitled to. If you receive one of these letters, check the amountyou could be due an extra refund.

Required Minimum Distributions Have Been Re-instituted

Retired folks got a break last year, as 2020’s Coronavirus Aid, Relief, and Economic Security Act (CARES Act) suspended required minimum distributions (RMDs) for the year. However, RMDs were back in effect for 2021. If you failed to withdraw your RMDs, you’ll have to pay a 50% excise tax on the amount you should’ve taken.

Tax-deductible Medical Expenses Increased

If you had any significant medical expenses in 2021, you could be in for a tax break. Any unreimbursed expenses that exceed 7.5% of your adjusted gross income are deductible. For example, if your adjusted gross income is $60,000 and you had $12,000 of out-of-pocket medical expenses, $7,500 would be deductible. You’ll need to itemize your taxes to take advantage of this, but it could be worthwhile depending on your healthcare costs.

Backlog of Unprocessed Returns

Due to pandemic-related delays, the IRS still has millions of unprocessed tax returns from last year. While they’re working to resolve the backlog, they haven’t provided a timeline for completion. Even if your 2020 tax year return is still pending, you can prepare and file your 2021 taxes as you normally would.

Other COVID Relief Credits 

If you're a business owner, you might also be eligible for two pandemic-related tax credits. Originally enacted as part of the CARES Act, they were extended to cover part of the 2021 tax year:

  • Employee Retention Credit - Any business that kept employees on payroll and suffered either a closure due to government regulations, or a substantial drop in revenue, qualifies for the credit
  • Sick and Family Leave Credits - Eligible businesses are entitled to credits for paying sick leave to employees who had COVID-19 or had to miss work to care for family members with the virus

When is the Deadline For Filing Taxes?

Traditionally, tax day is April 15. But thanks to the Emancipation Day holiday in Washington, D.C., the deadline is April 18 this year. There are exceptions for certain states, though:

  • Taxpayers impacted by the late 2021 Colorado wildfires or the December tornadoes in Illinois, Kentucky, and Tennessee have until May 16 to file
  • Residents of Maine and Massachusetts have until April 19, as both states celebrate Patriots’ Day on April 18

April 18 is also the deadline for requesting an extension this year, allowing you to file your taxes until October 17. However, any taxes you owe are still due on April 18. The IRS will assess penalties on any unpaid amounts, so even if you need an extension, it’s good to estimate your taxes and pay what you’re likely to owe.

When to Expect Your Tax Refund

This will be a complex tax season, but the IRS still anticipates processing the majority of returns fairly quickly. They estimate that most people who file electronically and choose to receive a direct deposit should receive their refund within three weeks.

However, that’s not a guarantee. Between the backlog of returns from 2021 and potential COVID-related delays, getting your refund could take longer. This is especially true if you wait until mid-April to complete your taxes, or if you file by mail.

Additionally, the IRS can’t issue refunds involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February. If you meet the criteria for either of those credits, you can still file your taxes as soon as possible, but processing will take a bit longer.

What is the Recovery Rebate Credit?

If you didn’t qualify for a third Economic Impact Payment (i.e. the 2021 stimulus checks) or received less than the full amount, you might be eligible for the Recovery Rebate Credit.

While the IRS is sending letters with the information you’ll need, you can also check your online account. Be sure to include accurate figures, as claiming the wrong credit could cause processing delays for your tax return.

Planning Beyond Tax Season

Tax season can be stressful. But it’s also a good time for a checkup on your overall situation, including your long-term financial plans:

  • Make sure you have emergency savings set aside so you’re prepared, come what may (be it a new variant, blizzard, wildfires, or sudden job loss)
  • Maximize your 401(k) and IRA contributions for the year, and if you’re 50 or older, don’t forget about catch-up contributions
  • Rebalance your portfolio to keep it aligned with your investing goals
  • Update your estate planning documents, including last will and testament, beneficiaries, and medical and/or durable power of attorney
  • Check your tax diversification and withdrawal strategy to make sure you’re not paying more than you need to from your retirement accounts 

If you need help shoring up your finances or retirement plans, get in touch with a financial advisor. A Certified Financial Planner can answer any questions you might have and keep you on the path to a secure and comfortable retirement.

Want to learn more about fiduciaries and how they stand out from other financial advisors? Download our Fiduciary Oath Guide today.

 

Denver Fiduciary Guide

 

For educational and informational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. The above is based on information available at the time of drafting this article and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. The opinions expressed by featured authors are their own and may not accurately reflect those of the Wealth Legacy Institute®. 

©2022 Wealth Legacy Institute

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