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Form 1040 for US tax preparation

It’s Tax Prep Season – Here’s What You Should Know

by Drew Overton | February 14, 2022 | Financial Planning, Tax Planning

It’s that wonderful time of the year again – tax prep season! That said, we want to provide a brief overview of the changes to the income tax rules and limits as well as answer any questions related to the tax-related documents you may need when filing your return.

The first thing you should know is that the due date for your 2021 Form 1040 is April 18, 2022, instead of April 15. An extension until October 17, 2022, is also available. Filing for an extension does not extend the time you have to pay your 2021 taxes. Thus, interest and penalties may apply if you don’t pay any balance due by the un-extended due date of the return.

What’s New for 2021 Tax Returns

  • The tuition and fees deduction is not available after 2020. Instead, the income limitations for the Lifetime Learning Credit have been increased.
  • Any economic impact payment you received in 2021 is not taxable for federal income tax purposes but will reduce your recovery rebate credit.
  • For 2021, the standard deduction amount has been increased for all filers. The amounts are: (1) $12,550 (Single or Married Filing Separately); (2) $25,100 (Married Filing Jointly or Qualifying Widow(er); and (3) $18,800 (Head of Household).
  • If you elect to not itemize your deductions in 2021, you may qualify to take a deduction for charitable contributions of up to $300 ($600 in the case of a joint return).
  • The American Rescue Plan (ARP) expanded the child and dependent care tax credit for 2021 by making it refundable for certain taxpayers and making it larger. For 2021, the dollar limit on qualifying expenses increases to $8,000 for one qualifying person and $16,000 for two or more qualifying persons.
  • Under the ARP, the child tax credit has been enhanced for 2021. The child tax credit has been extended to qualifying children under age 18. Depending on modified adjusted gross income, you may receive an enhanced credit amount of up to $3,600 for a qualifying child under age 6 and up to $3,000 for a qualifying child over age 5 and under age 18.
  • The deduction limits for traditional IRA contributions as well as the contributions limits for Roth IRAs have both increased for 2021, depending on your filing status and modified adjusted gross income. Click here to view the 2021 IRA deduction limits or click here to see the Roth IRA contribution limits.

Items Needed to Prepare Your 2021 Tax Return

All information that you provide to your tax preparer should, to the best of your knowledge and belief, be accurate and complete. Be sure to keep all documents, records, and other evidence to substantiate all of the entries on your returns. We recommend that you keep these documents for your records.

Also keep records pertaining to items such as home purchases/sales, refinancings, home improvements, and gifts to family members or third parties. Retaining such information will better protect you in the event of any inquiry by the IRS or state tax department.

When gathering information for your tax preparer – whether you use a CPA or you file your own taxes using a tax prep software – take a look at the list below for a general guideline of what may be needed.

  • Prior Year Returns: A copy of your federal and state income tax returns from last year, including any amended returns, together with a copy of any correspondence you have received in relation to them from the IRS or a state taxing authority.
  • Estimated Tax Payments: The amount of any estimated tax payments (federal and state) made for tax year 2021 (including a 2021 fourth quarter state estimated payment made by December 31, 2021) and any amounts for prior years’ state taxes paid in 2021, including any balance due for 2020 paid in 2021.
  • 2021 Economic Impact Payments/Advance Child Tax Credit Payments: The amount of any economic impact payment you may have received in 2021 and/or the amount of any advance payments of the Child Tax Credit that you may have received in 2021.
  • Dependents: The name of any dependents you intend to include on your return, their SSN, their birthdate, and their relationship to you.

Your tax preparer will also need records of any of the following categories of income and expenses incurred by you and/or your spouse during 2021:

  • Wages, Interest, Dividends and Other Miscellaneous Income: Any W-2s or Forms 1099, together with records of any other compensation received during the year.
  • Investment Income and Expenses: Details as to any investment property, including stocks, bonds, virtual currency, and real estate, you sold during the year. Most financial institutions send out 1099s in mid-February.
  • K-1, K-2, K-3 Forms: Any Schedule K-1s, K-2s, K-3s you received from partnerships, S corporations, LLCs, LLPs estates or trusts of which you are an investor or beneficiary.
  • Business Income and Expenses: Business income and expenses from any unincorporated business (sole proprietorship) or single-member LLC you operated during the year. This may include businesses for which you received a Form 1099 or a Schedule K-1, K-2 and/or K-3.
  • Other Income Items: Details as to any other sources of income, such as income from rents, royalties, trusts and estates, farming, unemployment compensation, social security benefits, and any other income received during the year.
  • Retirement Plan Contributions and Distributions: The date and amount of contributions made to an Individual Retirement Account (IRA), Roth IRA, Simplified Employee Pension (SEP), etc.
  • Alimony and Child Support: Generally, for divorce or separation instruments executed before 2019, alimony payments are included in the gross income of the recipient and are deductible by the payor.
  • Medical Expenses: If you had significant medical, dental or medication expenses not reimbursed by your health insurance, you may want to provide information about such expenses. Also include any amounts you paid for health and long-term care premiums.
  • Health Insurance: If you, your spouse, or a dependent had health coverage in 2021, the provider of that coverage is required to send a Form 1095-A, Form 1095-B, or Form 1095-C listing the individuals in your family who were enrolled in the coverage and showing their months of coverage.
  • Taxes: In addition to taxes withheld and already reflected on your W-2s and Forms 1099, you may want to include documentation on other taxes you paid during the year, including federal and state income tax, self-employment tax, real property tax, sales tax and personal property tax.
  • Mortgage Interest on Personal Residence and Other Home(s): Please provide the amount of interest you paid during the year on any mortgage or home equity loan as well as the statement (Form 1098) furnished by your mortgage interest lender(s).
  • Charitable Contributions: The amount of any gifts to religious organizations or other charities, in cash or property, the names of such charitable organizations, and any contribution receipts.
  • Tax Credits: Information and documentation that may allow you to claim certain refundable and non-refundable tax credits such as the child tax credit, education credits, the earned income tax credit, the recovery rebate credit and certain energy-efficiency related credits, etc.

For those of you who are still reading, congratulations. Go ahead and give yourself a pat on the back as this is quite a dry topic. We hope this tax preparation overview was helpful as we all navigate the 2021 tax season together. If you have any questions regarding the information above, or if you would like to discuss our financial planning solutions, give Tull Financial Group a call at (757) 436-1122.

Reproduced with permission from Bloomberg Tax & Accounting. Published 2021. Copyright 2021 by The Bureau of National Affairs, Inc. (800-372-1033) ¶3820.100. Client Letter — 2021 Tax Year Individual Return Preparation (Form 1040).