5 ways to get a bigger — and quicker — tax refund

5 ways to get a bigger — and quicker — tax refund

Capitol Hill negotiations on a massive social safety net bill moved in fits and starts during 2021, and there’s no resolution in sight as the year concludes.

The on-again, off-again political wrangling in Washington, D.C. is one reason many taxpayers may want to move briskly with their income tax returns in 2022.

For starters, a tax refund around late winter or early spring 2022 could create much-needed cash flow for many people if the fate of the enhanced child tax credit is uncertain or doomed.

Between July and December, the credit’s advance payments put almost $93 billion in parents’ pockets. A 2022 round of payments is part of the Biden administration’s proposed social safety bill. But Sen. Joe Manchin, a much-needed centrist Democrat, says he will not back the bill in its current form. The Biden administration sounds open to working with Republicans, like Sen. Mitt Romney, on payments to parents.

Another reason to move quickly on taxes next year: A tax refund could provide a cash infusion to help pay down credit card bills before borrowing costs go up.

The Federal Reserve is penciling in three increases in 2022 for its benchmark interest rate. Among other things, that could translate into higher credit card APRs, experts say. The Fed’s potential rate hikes and its faster completion of a pandemic-related bond buying program are attempts to fight the hot inflation eating into people’s budgets.

“There’s no doubt there’s going to be individuals with all those factors impacting them, and they are really going to want that tax refund as quickly as possible,” said Jerry Zeigler, an enrolled agent and financial counselor who owns JZ Financial Management.

‘There’s going to be individuals with all those factors impacting them, and they are really going to want that tax refund as quickly as possible.’


— Ferry Zeigler, an enrolled agent and financial counselor and owner of JZ Financial Management

“There’s a lot of ‘what if’s’ that could still come out,” said Luis Rosa, owner of Build A Better Financial Future. Rosa, a financial planner and enrolled agent, spoke to MarketWatch hours after the Biden administration said it would extend the student loan payment pause through May 1.

When payments resume, it may be a difficult reset for some cash-strapped households. For these people, Rosa said, “If you can get a jump on that tax refund to give you some padding, that would be great.”

The precise tax policy provisions arising from political debates and the pace of processing at the Internal Revenue Service may be outside taxpayers’ control, Zeigler said.

But they can do their best to be ready with a return that goes through without delay, accessing all the deductions and credits that can reduce tax liability and boost refund sizes. “You can control the factors that go into that,” he said.

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When preparing for the 2022 tax season, here’s what to do now and the coming months:

Keep this child tax credit paperwork from the IRS

In March, the American Rescue Plan increased the 2021 child tax credit payout from $2,000 to a $3,600 maximum per child under age 6, and up to $3,000 for children between ages 6 and 17.

The IRS paid half the sum in the monthly installments and the remainder will be incorporated into the tax refund.

Starting later this month and continuing in January, the IRS is going to send a form, Letter 6419, stating how much it’s already paid each family.

The credit’s advance payments have rules including an income threshold for full payment. It’s $75,000 for an individual and $150,000 for a married couple filing jointly, with a phaseout above that point.

If the IRS determined it overpaid to a household making too much income, it’s going to subtract the overpayment from the forthcoming tax refund. If it paid too little during the year — perhaps because a child was born while payments rolled out — it will square up the amount at tax time.

Either way, the letter is a touchstone for what happens next. “You need to keep this and any other IRS letters you received about advance CTC payments you received with your tax records and refer to them when you file,” according to the IRS.

It’s possible to determine how much CTC cash a person has already received by viewing bank records or their online IRS account, Zeigler said. But a guesstimate based on bank records leaves a chance for a mistake, so Zeigler is already notifying clients he’ll want to see these letters — and he’ll bet other tax preparation professionals will also feel the same way.

Keep an eye out for an IRS letter on how much it sent for third-round stimulus checks

The IRS is going to send a document called Letter 6457 on how much it paid a household for the third round of direct payments authorized during the American Rescue Plan passed in March. These letters will start rolling out in late January.

The upcoming tax return is the time to claim missed-out stimulus check money, just as it was when people filed returns earlier this year to claim owed money from the first- and second-round checks in 2020. The owed stimulus check money, also called Economic Impact Payments, will come as a Recovery Rebate Credit that gets folded into the refund.

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There’s a big difference between the stimulus check and the advance Child Tax Credit payments. If it turns out the IRS paid too much to a household that ultimately earns more than the $75,000/$150,000 threshold for full payment, it’s not going to claw back the money.

There’s a similarity too: if the numbers the IRS has don’t match what taxpayers are claiming they are owed for stimulus checks or child tax credit payments, the IRS is going to take time to figure it out. And the agency already is backed up.

As of Dec. 10, the agency still had 6.2 million unprocessed tax returns from this tax season. That includes returns where Recovery Rebate Credit amounts have to be corrected after a discrepancy, the IRS says.

Start tallying the money spent for child care during 2021 to take advantage of this tax credit

The Child and Dependent Care Credit is different from the child tax credit, but lawmakers also enhanced the Child and Dependent Care Credit’s potential payouts during the upcoming tax season. The credit is meant to defray the child care costs so parents can work. In certain cases, it applies to adult dependent care too.

The lack of childcare was one factor holding many workers from re-entering the labor force in 2021, according to economic experts like Cleveland Federal Reserve President Loretta Mester.

In the upcoming tax season, the IRS is paying up to half of an eligible household’s work-related care expenses. In certain instances, that comes to a credit up to $4,000 for one child and $8,000 for two or more children. That’s up from the maximum 2020 credit of $1,050 for one eligible child/qualifying adult dependent and $2,100 for two or more.

The IRS will gradually stop paying half the amount once adjusted gross income surpasses $125,000. The phase-out ends completely for adjusted gross income above $438,000. Last year, the IRS paid 35% of the work-related expenses.

The IRS will want information about the person or daycare facility providing the care. “To identify the care provider, you must give the provider’s name, address, and taxpayer identification number,” the IRS said. If the daycare is provided by a person like a nanny and a taxpayer wants to claim the credit, the IRS will want to know the caregiver’s name and information like their social security number or individual taxpayer identification number, Rosa said.

Contribute to charity now to trim your tax bill next year

Traditionally, tax write-offs on charitable contributions were reserved for people who made itemized deductions. But with most people now taking the standard deduction, the tax benefits of donations were out of reach — at least until the pandemic.

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Through Dec. 31, people who will take the standard deduction can also claim a deduction for the money they give to nonprofit organizations. It’s up to $300 for individuals and up to $600 for married couples filing jointly.

Lawmakers created the write-off as part of the CARES Act passed in March 2020 and later increased the deduction amount to $600 for married couples. For now, the deduction applies only to donations made through Dec. 31. Charities and nonprofits want to extend and expand it.

Reduce income with eligible contributions to retirement accounts, or assets that can be sold at a loss

Contributions to traditional IRAs may be tax deductible, depending on certain IRS rules. That includes whether the person or their spouse has a retirement plan through work. It also depends on how much money a household is worth.

For example, an individual with a modified adjusted gross income of up to $66,000 this year can take a full deduction up to their contribution limit even if they have a retirement plan at work. In that instance, the deduction phases out and completely ends for people making above $76,000.

IRA contributions for this year can be made until April 15, 2022.

Meanwhile, the recent volatility in the stock market might be a headache — but it’s also a chance for a tax benefit to reduce income.

Uncle Sam takes a cut on capital gains, but he also gives a break on losses that can offset the tax bill for the gains. If capital losses surpass capital gains, the IRS says taxpayers can claim losses up to $3,000 to lower income in one year. (If the net capital loss is more than $3,000, the remainder can be carried forward, the IRS notes.)

“Right now is a great time to analyze your investment portfolio to see if any investments are down and there are some unrealized losses you can take,” said Rosa.

One specific move can work for cryptocurrency investors
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Rosa noted. The IRS has a “wash sale” rule that disallows the benefits of a tax loss if someone sells securities at a loss, but quickly buys the same or substanially similar one soon after.

The wash sale, however, doesn’t apply to cryptocurrency, Rosa and others noted. Rosa said a sale for a loss before the end of the year and a quick re-purchase on the hopes of steadier 2022 profits “could be a strategy.”

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