Don’t file your tax returns without knowing these
Three Important Changes

Wednesday, January 27, 2022  by Timothy Perry

The floodgates for filing 2021 taxes opened on January 24, 2022, and marks the third tax season significantly disrupted by the Covid-19 pandemic. The IRS Commissioner, Chuck Rettig warned us early on to prepare for a turbulent tax filing season. He said, "in many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserve and need”. He went on to admit that like the taxpayers, this frustrates both him and his IRS employees.

The IRS is so backed up that they will likely not finish processing last year's 2020 returns by tax day. Despite this, they are not giving taxpayers a reprieve other than three extra days since April 15 lands on the first day of a 3-day holiday weekend. The due date for most Americans to file and pay is Monday, April 18th, 2022.

The top 3 important changes taxpayers need to know:

 - We’ll start with one potentially positive change -

It’s Not Too Late To Receive Missed Economic Impact Payments! Claim Them On Your Return 

Over the early part of the pandemic, the federal government sent out three rounds of "Economic Impact Payments"

First Round: April 2020

The CAREs Act included a provision for a round of stimulus payments. Eligible adult taxpayers received a “stimulus check” up to $1,200 while eligible dependents under 16 years of age received $500 each (maximum 3 dependents). Everyone whose AGI (Adjusted Gross Income) was under the set limits of $75,000 for individuals and $150,000 for those married filing jointly. Individuals making up to $99,000 and joint filers up to $198,000 received a reduced amount. The first stimulus checks started hitting people's bank accounts on April 11, 2020.

Second Round: December 2020

More aid came on  December 27, 2020, when then-President Trump signed a $900 billion package that was part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. Incredibly, payments started hitting accounts just 2 days later on December 29th.  The act provided a $600 check plus an additional $600 for eligible dependent children. The income cutoff to receive full payment remained $75,000 for individuals but the maximum income before becoming ineligible was reduced from $99,000 to $87,000.

Third Round: March 2021

Immediately after being sworn in, newly-elected President Joe Biden unveiled his American Rescue Plan (ARP) which provided for a third round of payments to Americans that included a $1,400 payment last spring. Same $75,000/$150,000 income limits but no reduced amount phase-out for those above this mark. If you haven’t received this payment you can claim it on your return. Eligible parents to newly-born children in 2021 are all eligible because the government didn’t know about the baby and therefore didn’t send payment.

Important: The IRS Recovery Rebate Credit allowed those who didn’t receive one or both of the first two stimulus payments to claim it on their 2020 federal tax returns. Be careful to only claim the missing stimulus payments this year that were not already claimed last year.

The Paying Of Child Tax Credits In Advance Will Lead To A Smaller Refund Despite Their Increase

The ARP increased the child tax credit from $2,000 to $3,000 or $3,600 depending on the child’s age. Upfront monthly payments were another positive change that came along with the increase. No longer did parents struggling to buy their children new shoes or a computer have to wait until tax time to realize their tax credit. They got it doled out to them in $250 or $300 monthly increments. Let’s be honest, there isn’t a downside to getting money sooner than later, but because families received up to half of their child tax credit in advance their refund may not be quite as big this year. For families who typically use their tax refund as a compulsory savings plan to pay for “big-ticket” items like laptops, home renovations, or luxury vacations… they may need to scale back this year. Parents have no grounds to curse the ARP but it still won’t stop the winds of jubilation from leaving their sails once they realize they can’t claim something they’ve already received. The bottom line, parents received more money this tax year compared to last regardless of when they received it.

Unemployment Benefits Are Taxable

The United States government increased federal unemployment benefits substantially in 2020 and 2021 as part of pandemic relief. The first $10,200 in unemployment benefits were exempt from federal income tax for the 2020 tax year but that’s not the case for 2021. Unemployment benefits have reverted to being fully taxed as ordinary income for 2022 tax filings. Taxpayers are typically opted in to tax withholding for unemployment benefits automatically. This will help a lot of people dodge a large surprise tax bill bullet but not everyone.

As we said, this tax season will be turbulent, and with over 7 million unprocessed returns from last year, the backlog will likely become a logjam. This all comes at a time when it is harder for taxpayers to get ahold of the IRS. Even we Tax Attorneys who have a special “Tax Practitioners Priority Line” have seen our hold times more than double over the course of the pandemic.