2021 was another atypical year. But how will this affect your taxes in April?
It's Financial Wellness Month, and we’re tackling the most common topics our Certified Financial Planner™ professionals get from Origin members. Today, we’re exploring taxes. You can catch up on our series by reading our previous posts about investments, student loan debt, and inflation.
Things have been far from “normal” since the start of the pandemic, and 2021 was no exception. With everything—from our work situations to the state of the economy—in flux, there are new considerations to take into account when filing your taxes for 2021. This post outlines 6 things to keep in mind.
Many of us continued to work remotely in 2021. And as we discovered in 2020, there are several tax implications to working from home. If you need a refresher, check out our extensive guide to navigating remote work and taxation—as both an employer and an employee.But here’s one of the most important things to remember for your taxes this year: just because you work from home, that doesn’t mean you qualify for home office deductions. That deduction is only available to qualifying self-employed taxpayers who work at home—not people who work remotely for a W-2 employer.
The child tax credit is exactly what it sounds like—a tax credit for people with qualifying dependent children. The tax credit, which is usually up to $2,000 per qualifying dependent, was expanded to up to $3,600 in 2021 as part of the COVID-19 relief package.As a qualifying taxpayer, you could either choose to receive advance payments—with half received as monthly payments from July through December of 2021—or claim the full credit when you file your returns. Here’s what you need to know, based on the decision you made:
There was a boom in the cryptocurrency and NFT marketplace during the pandemic. According to research by Origin, 30% of U.S. workers are putting their additional income after paying all their expenses into cryptocurrency. The IRS requires you to answer a yes/no question on your tax return stating if you received, sold, exchanged or disposed of a financial interest in a virtual currency. If you were paid in, mined, traded or sold cryptocurrency or NFTs this year, you will have to disclose this to the IRS and pay taxes on it. This requires you keeping careful record of purchase dates, sell dates, and proceeds available. If you’re working with a tax preparer, make sure to give them all the necessary information and paperwork in time.
Typically, if you dip into a tax-deferred retirement account early, you have to pay a penalty of 10%. But as part of coronavirus relief efforts, people were allowed to withdraw up to $100,000 from their 401(k) and IRA accounts without penalty in 2021—if they met certain qualifications. While there were no penalties, there are still tax implications. If you took out money from one of your accounts, the withdrawal must be added to your taxable income. But you have 2 options for paying these taxes. You can either:
Contact your tax preparer to discuss your options.
When filing taxes, people can choose between a standard deduction and itemized deductions. While the latter option can lead to more savings, 90% of American households opt for the standard deduction because they either don’t want to or are not eligible to itemize their deductions. Typically, only taxpayers who itemize their deductions would be able to take a charitable deduction. However, due to COVID legislation, the government allows people to deduct up to $300 of charitable cash contributions made to qualifying charities—even if they take the standard deduction. This number is doubled to $600 for married couples who are filing jointly. If you made charitable donations in 2021, make sure to report them to take advantage of this one-time benefit.
Starting in 2020, the government issued 3 Economic Impact Payments to eligible households. However, some people may have received less than the full amount or didn't qualify for a third payment based on an earlier tax return (but qualify now). If this applies to you, you may be eligible to claim a Recovery Rebate Credit on your 2021 federal tax return. Keep an eye out for Letter 6475 in early 2022—you'll need it to calculate your 2021 Recovery Rebate Credit when you file your taxes. If you need more information, visit the Recovery Rebate Credit Information Center.Now is the time to start preparing your tax return for 2021. We encourage everyone to work with a tax preparer or financial professional this tax season. Origin Financial Planners are able to help review common tax planning strategies and concepts and can walk you through tips and best practices in finding a Certified Public Accountant. If you don’t have access to financial support, tell your employer about Origin.