Tax Tip Tuesday: Check-in, Checkup

Tax Tip Tuesday

Imagine that it’s January 2023 and you are facing the daunting task of organizing your tax documents.  It’s not a task that most people look forward to.  And if you have more than your personal return to prepare, it can be even more time consuming.

But what’s worse than that?  Finding out that you did not prepare adequately for the changes that occurred not only in your life but in the tax code.  And now you are faced with a nasty tax surprise.

Thankfully it’s only August, but you better keep reading if you don’t want to face a nasty tax surprise.  And there’s absolutely no reason for you to be surprised about your taxes.

Since it’s not January, but August, we have ample time to prepare.  Plus, since more than half of the year is complete, and you probably have a good idea of what the rest of the year is going to look like, now is a great time to check-in with your tax professional and get a check-up of what your taxes are going to be looking like.

By considering your taxes now, you have a few months to make any adjustments or make decisions about changes you would like to do. 2022 taxes are going to be very different from the 2021 because in 2021 we had all of those odd tax changes such as the stimulus payments and the changes for the child tax credit and the daycare expenses.  When you file your 2022 return, all of those changes will revert back to the old rules. And every life event can cause additional changes to your tax situation.

So here we are at the beginning of August. 

Think about the life events going on this year. 

Did you get married?  Or divorced?  Did you have a baby? Or adopt a baby?  Do you have kids that’ll be going off to college?  Do you know what type of college expenses you can claim on your taxes?  Should you be paying for college with a 529 plan? Or should you be cashing in savings bonds?  These are the type of questions you should be asking when life events happen that have implications on your tax return.  Click the following link for more info as well as FAQs for many of the most common life events and what you should consider: https://saunderstax.com/life-events.php

Now let’s address things happening outside of your home.  Consider what has happened to your investments in the stock market so far this year.  Is there something that needs to be changing in your investments that can affect your taxes?  This might be a great time for you to do something like I am doing which is rolling money from a Traditional IRA over into a Roth IRA.  This is a great strategy to use when the markets are down.  For financial guides, calculators and FAQs, visit: https://saunderstax.com/life-events.php

Now let’s consider a couple specific tax changes that will likely make a significant change on tax returns this year.  And that is from all of the COVID tax changes that revert back to 2020 rules.  One of the biggest ones that families will feel is the change to the Child Tax Credit.  In 2021, the Enhanced Child Tax Credit meant that taxpayers with children ages 6 to 17 could get a credit of up to $3,000. For children under 6, the amount jumped to $3,600. For 2022, that amount reverted to $2,000 per child dependent 16 and younger.  Last year the tax credit was also fully refundable, meaning that if the credit amount a taxpayer qualified for exceeded the amount of taxes they owed, they could get the difference back. There was also no minimum amount of income you needed to earn to get the refund.  In 2022, the tax credit will be refundable only up to $1,500 (up from $1,400 in 2020 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund. 

Change to Child and Dependent Care Credit

Another big change is in store for those who claim the Child and Dependent Care Tax Credit.  Due to the pandemic, there were significant increases to the dependent care credit.  The credit is based on the amount of expenses for daycare.  For 2021 we could include expenses of up to $8,000 for one child and $16,000 for 2 or more children.  Unfortunately, those increases will also revert back to 2020 standards of $3,000 for one child and $6,000 for two or mor children.  

So with just these changes, 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.  This would definitely be a nasty tax surprise.

If you benefited from the Recovery Rebate Credit last year, that’s another chunk of change that you will not be receiving this year.  That’s because there were no stimulus payments issued in 2022.

For those claiming Mileage Expense, you better be tracking and aware of another change.  Because of this year’s historic inflation, it prompted the Internal Revenue Service to implement a mid-year bump up of the annual optional standard mileage rates for tax-deductible driving. The 4-cent hikes for allowable business, medical, and relocation miles driven took effect on July 1, and will last through Dec. 31. So be sure to identify your pre-July 1 and post-July 1 mileage.

Knowing even what questions to ask and understanding how reverting back to pre-pandemic tax rules can affect you is both complex and confusing.  But one thing you can be sure of is that your next tax result will be significantly different when you file your 2022 taxes in 2023.  That is, unless you check-in with your tax professional and schedule a mid-year tax check-up.  If you would like to check-in with one of our tax professionals and schedule that check-up so that you can make the necessary changes before it’s too late, contact us at www.saunderstax.com/contact.php or at 301-714-2071 .  Our passion is helping you experience a Less Taxing Life and More Prosperous Solutions.  To see how Saunders Tax & Accounting can help you, visit www.SaundersTax.com.

Comments

Advertisement