Millions of Americans are getting ready to file federal income tax returns. A new survey by NerdWallet shows that people’s lifestyles, tax laws, and misinformation could make it difficult.
According to The Harris Poll survey, incomes have fluctuated, people have moved around from one state to another, received unemployment and child credit payments, and have started freelancing or invested. This was according to an online poll conducted by The Harris Poll between Dec. 13-15 2021. These changes can have a significant impact on filers’ returns and their bottom line.
Many Americans have experienced a period of transition over the past year. Many of these changes, such as moving to another state, losing a job or getting married can have a significant impact on your taxes,” Kimberly Palmer, NerdWallet personal financial expert, says. Understanding these details can help you navigate tax season and avoid possible penalties .”
Note : Americans who indicated that they intend to file or have filed a federal tax return in the specified tax year are called “filers”.
Anticipated tax bills are more than expected refunds. On average, filers who expect to owe $3,479 when they file a 2021 Federal Return anticipate a $3.479 bill. Expect a refund of $2,221.
Taxpayers take steps to reduce their liability. Nearly three-quarters (72%) said that they have taken or will take steps to reduce their tax bill in 2021. This is an increase of 65% compared to 2020 filers.
Child tax credit payments are confusing for some recipients. According to the survey, more than 2 out 5 Americans (44%) who received child tax credit payments in advance in 2021 believed that these payments were taxable. These payments will not be subject to tax, but filers will need to account for them. Filers who receive more than they are entitled to may be required to repay the excess.
There are many changes in income sources and amounts. A third (33%) of Americans believe their household income has decreased. 26% say that their household income has increased. 11% have started doing freelancing and gig work, while 12% claim to be receiving unemployment benefits in 2021. These changes can have an impact on the tax return of taxpayers.
Expectations for Refunds are stable, but tax bill expectations remain high
A little over half (51%) of Americans who filed 2021 federal income tax returns are expecting to receive a refund. This is in line with previous years’ findings (51% for 2019; 50% for 2020). According to the survey, they expect to receive refunds roughly equivalent in size to those of previous years — $2,221 average, $2,207 for 2019, and $2,032 2020.
42% of people expecting one answered that they would put money in savings when asked how they planned to use their refund. This is the third year that we have asked the question and savings has been the most popular destination for refunds.
Nearly one-quarter (23%) expects to owe federal taxes, which averages $3,479 for those who file a 2021 return. This is an increase of $2,781 for 2020 filers who expect to receive a bill and $2,667 for 2019 filers.
Many factors could have an impact on 2021 returns
72 percent of those who plan to file a 2021 federal return declare that they have taken steps or will take measures to reduce their federal tax bill in 2021 or lower their overall owe. This is an increase of 65% from the previous year.
Millennial filers have a higher likelihood of taking such steps (82%), than 75% of Gen Z (72% of Gen X) and 65% of the baby boomers (65%).
Even those who did not take deliberate steps to lower their tax burden could find their tax outcomes different this year due to changes in their lives or those caused by the pandemic.
The IRS makes adjustments to offset the inflation effects that have been affecting filers for decades. This is one thing that works in filers’ favor. According to the survey, only 37% of Americans are aware that income tax brackets can be adjusted to account inflation. Annual adjustments to tax brackets and other adjustments are made by the IRS to account for inflation.
Child tax credit
A child tax credit is available to taxpayers with children who earn less than a certain income threshold. This reduces their tax bill by a dollar. The child tax credit increased from $2,000 per child in 2021 to $3,600. Qualified taxpayers can now receive a portion of the credit in advance for the first-ever time, beginning in July 2021. Monthly payments began in July 2021.
While the IRS paid out billions in payments, those who received them might not realize their full impact until it is time to file.
According to the survey, 44% of those who received child tax credit payments for advanced children in 2021 believed that these payments were taxable. However, this is not the case and recipients might need to “settle down” when it comes to filing. These payments were based on 2020 tax returns data. A 2021 income change or an increase in qualifying dependents could have led to an IRS overpayment.
“While child tax credit payments to children in advance were a lifeline for many families, they can make it more difficult for taxpayers to file taxes for 2021. Palmer says that recipients will have to keep track of the payments and pay back any excess.
Taxpayer tip. Taxpayers who are eligible for the child credit must reconcile their eligibility with any payments they have received during 2021. Your credit for the year was half covered by advance payments. The IRS should have sent a letter to all those who received an advance payment. It contained helpful information and the amount paid. You can access your child tax credit update portal payment information if you lost or misplaced it.
Income changes , freelancing and unemployment
Your income can have a significant impact on your tax burden. Your return can also change if you are unemployed, change your job, or pursue self-employment.
33 percent of Americans believe their household income fell in 2021. 22% blamed the pandemic, 11% blamed unrelated events. About one-fourth of Americans (26%) claim their income has increased. These changes can place filers into a new tax bracket, allow them to claim additional credits, or cause underpayments and subsequent tax bills.
According to the survey, 11% of Americans started freelancing work. Freelancers often don’t have to pay taxes. This means that workers who are new to freelancing may be shocked at the amount they owe.
Despite the record low unemployment rate, 12 percent of Americans reported receiving unemployment benefits in 2021. Many may not know how to deal with them when it comes time for tax. According to the survey, 15% of people who have received unemployment benefits do not believe that these benefits are taxable.
All unemployment was taxable historically. The American Rescue Plan Act of 2021 has changed the way that this tax works. For people earning $150,000 or less, the first $10,200 in benefits is non-taxable. The IRS has issued approximately $14.4 billion worth of refunds to unemployment taxes that were paid prior to the rescue plan’s implementation as of November 1, 2021.
Taxpayer tip – If you don’t have a professional tax preparer to help you, tax software can help you ensure that you file a correct return regardless of how much your income has changed. Taxpayers with incomes below $73,000 can file their federal returns online using IRS Free File. You can find companies that offer this service by going to the IRS Free File website. If you are not eligible for free online filing, there are many tax software companies that offer packages at different price points depending on how complex your return is.
According to the survey, 12.9 million Americans (or 5%) will report moving from one place to another in 2021. Your income taxes can be complicated by moving. Most cases require you to file if you are a resident who earned income in that state. If you are a resident and have earned income in more than one state, it is necessary to file two income tax returns.
According to the survey, 1/10 (11%) Americans think you won’t be responsible for filing in more than one state if you change your mind mid-year.
Taxpayer tip: The state tax laws and how each state defines residency can vary widely. Tax software will guide you through the process of determining where and how to pay taxes. If you are unsure, contact the department of revenue in your state. Failure to file a state tax return on time can lead to heavy penalties, interest and fees.
According to the survey, nearly one-third (31%) of 2021 filers planned or made charitable contributions to lower their federal tax bill. And 13% of Americans said they made or increased their contributions to charities in 2021.
Prior to 2021, only those who itemized could deduct donations for charities. However, those who file jointly and take the standard deduction now have the option to write off $300 or $600.
Taxpayer tip: In order to claim charitable donations as deductions, you must have the IRS approve the gift recipient. Double-check your filings using the Tax Exempt Organization Search Tool. You will need to itemize all deductions if you want to deduct more that the $300-$600 limit. The amount of deductions that are allowed varies depending on the type of contribution and the organization.
Palmer states that it is easier to file taxes on time and avoid penalties for errors or underpayments by being familiar with the potential impacts of life changes. You don’t need to be an expert in tax law, but understanding the basics of federal and state income taxes and deductions can help you avoid expensive surprises later span>
The Harris Poll conducted this survey online in the U.S. for NerdWallet between Dec. 13-15 2021 among 2,051 U.S. adults aged 18 and over. 1,644 of these will file a federal tax return in 2021. The online survey does not use a probability sample, so it is impossible to estimate the theoretical sampling error. Sarah Borland, [email protected] can provide more information about the survey methodology including weighting variables, subgroup sample sizes and other details.
Based on the U.S. Census Bureau adult population estimate, July 1, 2021.
NerdWallet defines Generations as: Generation Z, 18-25, millennials, 26-41, Generation X, 42-57, Generation X, and baby boomers (58-76).
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