What to do now to prepare for the 2022 tax season
Tax day is April 15, 2022 — which may feel like a long way off. But let’s get ahead of the game as we gear up for what could be another unusual tax year. Here are some top tips and changes to think through now and best position yourself for the end of the 2021 tax year:
1. Advantages to making your January 2022 mortgage payment in December 2021.
There are several ways to maximize your mortgage interest deduction, but it’s important to know who qualifies for this and the limitations. One is making your January mortgage payment early, in December. Doing this (and making it clear to your bank that the payment is not a principal reduction, and that the payment posts before Dec. 31) means that the interest from that extra payment will count towards your 2021 reduction.
This strategy is only applicable to those who itemize their federal income tax returns. It’s generally thought that itemizing only makes sense if your itemized deductions would equate to more than the standard dedication. You can only claim a deduction on the interest you’ve paid on your mortgage loan — not the principal — and interest paid on a second home or vacation property is generally ineligible. Based on the specifics of your loan and the state in which you reside, there may also be caps to the maximum amount you can deduct.
To explore whether itemizing taxes and making an early mortgage payment are to your advantage, it’s important to confer with a certified tax professional. Your Sente Mortgage Banker will have a trusted recommendation for you.
2. Medical Deductions.
The December 2020 tax law included making a lower threshold for deducting medical expenses permanent. The 2017 tax law had raised the floor for deducting unreimbursed medical expenses from 7.5% of taxpayers’ income to 10%. As of December 2020, this rule was reverted back to 7.5% and has now been made permanent. This deduction can also only be taken if you itemize your taxes.
3. Tax Breaks on Education Expenses.
While the deduction for tuition and related expenses has been dropped, as of 2021, taxpayers can benefit from expanded income limits for the Lifetime Learning Credit. Tax credits can have a bigger impact than deductions because they “directly reduce the amount of tax owed.” The Lifetime Learning Credit provides a maximum annual amount up to $2,000 per tax return, according to the Tax Foundation.
4. Advanced Child Tax Credit Payments.
Starting in July, many families saw enhanced child tax credits. The American Rescue Plan passed in March increased the benefit to $3,000 (previously $2,000) with a $600 bonus for children under the age of 6 for the 2021 tax year. Families that filed a tax return in 2019 or 2020 and hard direct deposit set up should have started receiving the credit in six monthly payments lasting from July to December of this year. Other families that don’t traditionally file taxes needed to sign-up for the credit via the IRS (there is still time to do this before the end of the year). These payments cannot be counted as income and are not taxable — and remember that they are advance payments for filers’ 2021 tax year child credits. Answers to common questions about the Child Tax Credit can be found here, on the IRS website.
5. Consider the Home Office Tax Deduction.
More self-employed taxpayers can benefit from this deduction thanks to loosened eligibility requirements. While you must have a dedicated space in your house used only for business purposes, you should be entitled to write-off related expenses. Click here to read more.
6. Be Careful With Your Stimulus Checks.
Reminder that any money received from the third stimulus payments aren’t considered taxable income, so taxpayers should not include them as income. If they do, they might pay more in taxes and have to request a refund later.
As always, it’s important to consult a certified tax professional when making decisions related to your taxes. To get connected to a trusted tax professional, contact your Sente Mortgage Banker!