Don't Mess With Taxes

You checked out my post on who has to file a tax return (thank you!) and confirmed that you're one of the select lucky few who doesn't have to file a 1040.

But you still might want to send the Internal Revenue Service a tax return. Here are 10 such should-file situations, starting with the ones that could get you a tax refund.

1. Too much tax was withheld. Most of us have income tax amounts taken from our regular paychecks. Other sources of income also sometimes take some tax amounts off the top. When too much is withheld, you're due the excess as a refund.

But the IRS doesn't automatically send this money out to the overwithheld taxpayers. The only way to get any of that prepaid tax money back is to file a tax return to collect your refund.

2. You made estimated tax payments. These usually four extra tax payments a year are made on earnings that aren't subject to withholding. Estimated taxes essentially are the self-employed version of paycheck withholding, but also are used to cover income from investment earnings or sales that produce capital gains sales. You want to make sure the IRS knows that you made estimated payments. And you definitely want to file if you overpaid them. As with excess withholding, the only way to get your extra estimated amount back is via a refund when you file a return.

3. You are eligible for the third COVID stimulus payment. In 2021, the IRS delivered another economic impact payment (EIP) to help folks facing financial difficulties due to the coronavirus pandemic. The total amount, which officially is the Recovery Rebate Credit (RRC), was $1,400 per person. The IRS used prior filing data to distribute the payments. Some folks got less than $1,400. Others didn't get any. In these cases, it probably was because they didn't qualify based on their previous tax filing information, specifically their earnings. If you were one of these folks and you now qualify based on your 2021 data, you need to file a return to get the rest or all of the RRC you're due.

4. You qualify for the enhanced Child Tax Credit. This popular tax break was bumped up by the same COVID legislation, the American Rescue Plan Act, that created the third EIP. And like that money, some of the Child Tax Credit (CTC) was delivered last year. Most eligible families got half of the credit — $1,800 for each child younger than age 6 and $1,500 for youngsters ages 6 to 17 — last year. To get the rest you must claim it when you file your 2021 tax return.

You never want to ignore any tax breaks, but tax credits are special. They reduce any tax you owe dollar-for-dollar. And the 2021 CTC also is fully refundable, meaning you can get its full value as tax refund even if you don't owe any tax.

5. You're eligible for the Earned Income Tax Credit. This tax credit, usually referred to by its acronym EITC, is available to lower-earning workers. For 2021, it was made available to more taxpayers and single filers without children get more of credit than before. Yes, COVID law changes again. It also is a refundable tax credit.

6. You got 1099 forms. There is a wide variety of 1099 tax statements that show how much money you got during the year from sources where a W-2 isn't used. There also are differing levels of earnings that trigger the issuance of various 1099s.

Self-employed individuals get 1099-NECs for their nonemployee work. If you received unemployment, it's all taxable again; the 2020 exclusion amount wasn't continued into last year. Those job-loss benefits will show up on a 1099-G. And investors get assorted 1099-DIV, 1099-INT, and/or 1099-B forms showing how much their portfolios or sales from them paid off during the year.

Even if all this money doesn't add up to enough to require you to file, you should anyway. Why? The IRS is copied on all these 1099s. A curious agent just might come asking questions about that income it heard about and whether you got any more you're not sharing.

The IRS itself notes on page 5 of its Publication 501 in discussing the 1099-B that "filing a return may keep you from getting a notice from the IRS." That's a convincing enough of a reason for me to file!

7. You qualify for the American Opportunity tax credit. This educational tax break could give you a credit of up to $2,500. Even better, a portion of the American Opportunity tax credit, up to $1,000, is refundable to some qualifying filers.

8. You qualify for the Affordable Care Act's Premium Tax Credit. Yes, the tax penalty for not buying medical coverage is gone. But Obamacare, which is how many folks still refer to the medical coverage they get through a health care marketplace, is still around. So is this tax break that helps eligible buyers of health insurance coverage through a marketplace.

If you didn't get the Premium Tax Credit (PTC) in advance to help pay your policy premiums, you can get reimbursed for the premiums you paid yourself. But to do that, you have to claim the PTC when, you got it, you file your tax return.

9. To establish a placeholder for tax carryforwards. There are some deductions and credits where, if you don't use them all in one tax year, you can use the remainder on subsequent filings. An entrepreneur — let's call her Sue in this example — had a terrible 2021 and ended up in the red. (Thanks COVID.) Sue also qualified for the home office deduction. But she can't use the home office write-off since she didn't make a profit, as the deduction can only be used against any profit.

Sue can, however, carry the unused home office deduction into this year, when she expects (fingers and toes crossed) to make more self-employment money. But in order to claim that carryforward amount in a better-paying year, she must file for the initial claim.

10. You must file a state return. Most states collect some sort of income tax. And most of those jurisdictions* use their residents' federal tax filings as the basis for the state returns. In those places, submitting a federal version could help you comply with your state tax responsibilities. Or even get you a state refund.

Now about that *asterisk. Nine states don't tax any earned income. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Tennessee's full no-tax status began on Jan. 1, 2021, when it got rid of its tax on interest and dividend income. New Hampshire still collects an unearned income tax on some investment amounts.

If any of these potentially positive tax-filing circumstances apply to you, send Uncle Sam and, if applicable, his state tax collecting cousins, a tax return.

Yes, it will take some work. But there's software, including no-cost via Free File, and tax professionals that can help.

And where your filed tax paperwork gets you a refund, that should more than make up for the hassle.

You also might find these items of interest:

• 8 reasons to file your 2021 tax return early
• 8 reasons to wait to file your 2021 tax return
• Tax statements you need to file your 2021 return

Advertisements