2021 is shaping up to be another tricky tax year—here's what you can do to stay prepared
The 2020 tax season may only be a few months in the rear-view mirror, but it's not too soon to start looking forward to next year's return. With the ripple effects of Covid still impacting the economy in the form of tax credits, remote work and more, 2021 is shaping up to be another tricky tax year.
"It's the third year of complex implications from the pandemic, including tax changes, life changes, society changes and all that goes with it," says Mark Steber, chief tax officer for Jackson Hewitt Tax Services.
A number of factors will make 2021 tax returns more complicated than average, including the third stimulus payment that started going out in March. Though the stimulus payments aren't considered taxable income, if taxpayers include them as income they will end up paying more in taxes and will ultimately need to request a refund.
The advance child tax credits will also be something that tens of millions of families will need to be aware of when filing, as it could impact their final return.
"Taxpayers have never received advance payments of tax credits that go on their tax return," Steber says. "It is something you have to account for. If you're due it, that's fine, it's an advance on the balance. If you're not due it, you may have to pay that balance back."
He added that there are a number of other complicating factors that will carry over from last year, including unemployment benefits and working remotely in different states. All together, Steber says "there's a lot for taxpayers to take in."
Here are two key things you can start doing now so that you are ready when tax day rolls around in 2022.
1. Do a mid-year tax checkup
Steber says that the biggest piece of advice he gives his clients is to do a mid-year tax checkup so that they know how the year is shaking out for them.
"Do a projection of what your tax return is going to look like knowing what the rules that changed are, knowing what might apply to you, knowing what's different from last year," he says. "A mid-year checkup will help you identify some problem areas or reinforce some comfort."
Steber recommends vising a tax professional, since mid-year checkups are generally free.
It's also perfectly fine to do it yourself. He recommends that people who want to do it on their own print out their last tax return and add the current year's information in the margins. Because it's right around the halfway point of the year, they should then multiply those numbers by two to get an idea of what the full year will look like.
Regardless of whether you enlist the services of a tax professional or file your taxes on your own, Steber recommends taking advantage of free tax resources. Doing your own research is important because it may result in you finding additional tax credits that you didn't know you were eligible for.
"The IRS isn't in the business of making sure you've got all your credits and all your benefits," he says. "They're in the business of making sure they get all their money."
Still, Steber points to the IRS website as a helpful service that covers frequently asked questions and has simple videos explaining complex tax topics.
2. Stay on top of your important documents and information
One of the biggest favors a taxpayer can do themselves is to be diligent about keeping track of all the information they will need for their tax returns, Steber says. Getting your stimulus numbers, child tax credit information and unemployment benefits together in one place now will streamline your tax process down the line.
"People who waited until the last minute the past couple of years really found themselves in an information crunch," Steber says. "It's only going to be bigger this year because more people are impacted."
He recommends that filers keep track of everything that happened to them this year — whether it be living through a natural disaster or going back to school or starting a new business — so that they don't forget anything come tax season.
"Start your list of things that might change your tax return and either learn about them on your own at tax time or tell your tax pro," he says. "You cannot give enough attention to the things that happened to you during the pandemic years."
Tax Day is April 15, 2022.
Sign up now: Get smarter about your money and career with our weekly newsletter
Don't miss: In 1999, Warren Buffett was asked how to build wealth—his advice still applies today