Picture this: For the past few years you’ve prepared your tax return and had a small but welcome refund. Now imagine your surprise when this year, you are required to write a fairly large check to settle your tax bill. So what gives? Here are some situations to watch for that can increase your tax liability:
New tax laws. The multiple bills passed to pay out assistance from government programs must now be accounted for on this year’s tax return. While the goal of the legislation is to reduce taxes, there are several changes that could cause you to pay more taxes, including:
- Repayment of duplicate economic stimulus checks.
- New taxability of unemployment benefits.
- Accounting for any small business loan and grant benefits.
- The reinstated required minimum distributions (RMD)
A child is no longer eligible. This year’s child tax credit is a big increase versus prior years. If you already received the money through the advance child tax credit payment system, it could impact your refund this year in comparison to prior years. In addition, as children get older they stop qualifying for certain tax credits. Here are some age requirements for popular tax benefits, specific to tax year 2021 and likely to change in future tax years:
- Child and Dependent Care Credit: under age 13
- Child Tax Credit: over age 17
- Earned Income Tax Credit: under age 19 (24 if a qualified student)
Earnings with Social Security benefits. If you are recently retired, start collecting Social Security Benefits, and then begin working part-time, you could be in for a tax surprise. These extra earnings could not only make your Social Security benefits taxable, it could result in a reduction of benefits.
Other life events. Life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth or becoming the head of household, others might surprise you and result in additional tax. If you are anticipating a life change that my affect your filing status, we suggest consulting with your tax professional.
Capital gains surprises from investments. While many tax-related investment decisions are within your control, there are times in which you may be at the mercy of your investment provider. For example, mutual funds often distribute capital gains at the end of the calendar year. The gains they distribute are reported on your tax form and thus on your tax return. Surprises are common, especially after strong market returns.
Want to avoid these surprises or evaluate strategies for mitigating or capitalizing on them? If you know that you’ve had a year in which you experienced changes to your financial situation, it’s in your best interest to consider the tax implications before filing season. If we can help, please be in touch.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.