The year 2020 was historically bizarre (to put it kindly), but 2021 wasn’t exactly smooth sailing. Sure, the U.S economy partly rebounded from the initial blows of the pandemic; and, for a precious few months, it looked like COVID may be waning — but behind the scenes, complex governmental changes were underway. Oh, and the pandemic definitely did not end; in fact, it got worse, with more people dying from the virus in 2021 than the year prior.
While the pandemic raged on, Congress got busy building strategies to help Americans stay afloat. In March 2021, it passed the $1.9 trillion American Rescue Plan Act — a kind of expansion on the $2.2 trillion CARES act passed in March 2020. Under the new plan, citizens received various aid, some of which is now coming back to haunt their tax returns. In other words, the benefits we received as part helped lessen our burden to the federal government, which in turn could lower the amount we’re entitled to as a tax refund.
“Many families will recall that, starting in July 2021, they started receiving monthly deposits (or checks) from the IRS as part of the government’s COVID-relief measures,” said Taylor Hoffman, an investment advisor and director of financial planning. “These payments were unlike the stimulus payments received throughout 2020 and 2021, in that they were actually partial prepayments of the child tax credit that many families receive on their tax return each year (whereas the stimulus payments were more like free money).”
The child tax credit is a dollar-for-dollar write-off on your tax bill, Hoffman explained: “So, in other words, the IRS was paying people up front for a tax credit they would have otherwise received when they filed their taxes.”
Last year’s child tax credit may cause some people to not get a refund because the IRS paid families up to half of their eligible child tax credit.
“Therefore,” Hoffman said, “when those families go to file their taxes, they will only have half of the credit left to use as a write-off.”
“U.S stocks had a fantastic year in 2021, with the S&P 500 returning nearly 29%. Other assets like cryptocurrencies boomed, with Bitcoin gaining 60% in 2021 and Ethereum returning nearly 400%,” said Scott Caufield, principal at Sophos Wealth Management. “Investors who realized some of their gains might find their taxes increasing quite a bit this year. Owners of mutual funds might be surprised to find they received capital gains distributions in 2021 that they will owe taxes on.”
You Heeded the Student Loan Moratorium
“The moratorium on payments has been extended into mid-2022 by the Biden administration,” said Ryan McCarty, owner/CEO of McCarty Money Matters. “This has been a saving grace throughout the pandemic, (but) paying no student loan interest means no student loan deduction. Depending on how much interest you pay in a given year, this can be either a negligible or sizable difference year over year in your overall tax picture.”
“Unemployment income is a big one and presently on everyone’s minds,” McCarty said. “In 2021, we saw a taxable exclusion on the first $10,200 of unemployment income received in 2020. This so far is not the case in 2022. If someone received only unemployment during 2021, the results may be negligible as your first dollars received are taxed at extremely low rates. If this was in addition to income received by a new job/endeavor, it could add a nice chunk of dollars that had no withholding.”
You Freelanced or Side-Hustled
“If you supplemented your lost income in 2021 by working as a contractor and received 1099s rather than W-2s, we can only hope you set some aside to pay for your self-employment tax rates,” McCarty said. “This is certainly an eye opener for those that have never dealt with such things.”
You Didn’t Make Enough Withheld Income
“If you didn’t work the entire year, either due to quitting or layoffs — both extremely relevant during 2021 — you will find yourself with less tax withheld from your check,” McCarty said. “If you did not adapt your withholding properly along the way via your W-4 with employers, you could be exposed to a vastly different number compared to years past.”
You Traded or Sold Crypto
“Selling cryptocurrency or trading cryptocurrency for another cryptocurrency is considered a sale of property, and any gain is subject to capital gains tax,” said Yvette D. Best, owner of Best Tax Solutions LLC. “Cryptocurrency transactions typically result in short-term gains (tax on profits from the sale of an asset held for a year or less) and the capital gains tax rate is equal to your ordinary income tax rate.”
“Identity theft is on the rise,” said Steven Jager, CPA and partner with Fineman West. “When someone files a tax return electronically using someone’s Social Security number (illegitimately), and then the ‘real’ tax return is filed legitimately, it is rejected. It must then be filed on paper and manually processed after the identity theft is investigated. It is a lengthy process and refunds can take a VERY long time to be received. We actually had a case where the refund of nearly a million dollars was just finally received on a tax return filed some years ago.”
The IRS Is Understaffed and Backlogged
“The IRS has a serious backlog of unprocessed regular filed tax returns and amended tax returns that will delay processing in 2022,” said Trenda Hackett, technical tax editor at Thomson Reuters Tax and Accounting. “In fact, as of late December, the IRS had backlogs of 6 million unprocessed original individual returns (Form 1040), 2.3 million unprocessed individual amended returns and about 5 million pieces of unprocessed taxpayer correspondence.”
If your tax information was amended or corrected and indicates that you are owed a refund, you might not receive a dime through no fault of your own, but because your account has not been updated by the IRS.
If you haven’t received your tax refund after six weeks of submitting your return, seek help from your local IRS office or call the federal agency. You also can check the status of your refund here.
