The deadline to file your tax return on time was yesterday, April 18th. As of today, your tax return is late. So what to do?
Thankfully, that is why IRS created the option to file an extension. This extension provides an extra 6 months to get your return in to IRS, state and local taxing authorities. Unfortunately, many people misunderstand what an extension is. It is an extension of time to provide a completed tax return. It is not an extension of time to pay taxes owed. When you file an extension, you must estimate what your taxes are going to be. If you estimate that you are going to owe, that money was due yesterday if you wanted to avoid any penalties. (If you are in this situation and do not know what to do now that you are late, I can help you resolve this problem. Visit www.saunderstax.com/services.php )
If you are one of the 70+ million that have already filed their 2021 tax return, then now is the time to shift your focus to what is going to be happening with 2022. In 2021, there were some special benefits that we will not have in 2022. There are no more stimulus payments. Those are gone. The Advance Child tax credit that had been paying a monthly check to families from July to December in 2021 is also gone. With this, things are going to look different on your 2022 tax return.
For example, the 2021 child tax credit was $3,600 for kids 0-5, and $3000 for kids 6-17. And those amounts were fully refundable, meaning after they wiped out all of your taxes, the difference would be refunded to you. But now for 2022, the amount reverts to a standard $2000 credit for kids 0-16 and only part of that is refundable. This is the same situation we had for 2020.
Another big change for families is the credit for child care expenses which had increased tremendously for 2021. For 2021, you could claim up to $8,000 of expense for one child and $16,000 of expenses for 2 or more children. The credit that was calculated on these expenses was a refundable credit, meaning that once the credit eliminated your taxes owed down to zero included, any excess was in your refund check. But for 2022 child care expenses, again we revert back to the 2020 rules. That is you can claim $3,000 of child care expenses for one child and $6,000 for 2 or more children. And unfortunately, whatever credit that came up to is not a refundable credit. It can only zero out your taxes.
So how much of a difference could this be and how does that look for my 2022 tax return? Consider this scenario for a family with 3 kids with daycare expenses for 2 children, and with everything else being the same for 2022 as it was for 2021. It will result in a $6500 difference on their bottom line. In this scenario, the family went from receiving a $2,000 refund in 2021 to owing $4500 in 2022.
So what can you do to make sure you are not like this scenario family? The first step is to consider changing your payroll withholdings for 2022 to prevent owing tax. Of course, it is rare that all other things remain the same. For example, you may receive a bonus in 2022, or perhaps get a raise. Or maybe some other situation occurs that effects your own personal tax scenario. That is why it is wise to consult with a tax professional when such changes occur so that you can plan accordingly and forecast how to compensate for those changes.
If you are interested in evaluating your 2022 tax scenario or have any other questions, contact my office at 301-714-2071 or visit www.saunderstax.com. We love helping people discover a Less Taxing Life and More Prosperous Solutions!