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 and the capital gains tax rate is equal to your ordinary income tax rate.
Irs Adjusted The Child Tax Credit On Your Return
It is possible that your refund is less than initially expected if different information was entered for your advanced child tax credit payments than what was actually issued by the IRS. The IRS sent Letter 6419 detailing the total amount of 2021 advance payments you received and the number of qualifying children used to calculate those advance payments. If you didnt enter an amount or entered an amount different than what the IRS has on file for you for the advance Child Tax Credit payments, this could cause an adjustment to your refund amount and cause delays.
Note for married filers, both spouses should each receive their own IRS letter 6419. It is important that information from both letters is added together on your tax return to avoid an adjustment to your return and avoid delays.
Why Do I Owe Money
If youve never had to pay the IRS money in the past and have a habit of getting an income tax refund on your return, youre likely surprised, irritated or angry. The feeling of confusion is a typical feeling. Its possible that you dont even be aware of the reason you owe IRS money. Shouldnt everyone receive a refund?
The only reason why you have to pay the IRS cash after youve filed your tax return If you paid tax less in the previous tax year than what you were required to pay . The reason for that you paid less than what you owe could be different.
If you are employed by a business that is a company, then the IRS demands that the employer withholds a portion of your salary each month to pay your tax. The amount to be withheld will depend on the W-4, which you completed at the time you began your job. If you have a debt and you did not instruct your employer to withhold sufficient funds from your paycheck.
In general, people who are in debt are self-employed and/or get a lot of 1099s in exchange for contracts. If youre self-employed, youre expected to pay tax estimates every quarter throughout the year. Even if youre paying tax estimates, its often not easy to get the correct amount. This is why that you are owed money.
Here are seven things you must know when you have to pay the IRS money
The sooner you get started sooner, the better off youll end up. Here are some tips you must be aware of:
Dont Skip Filing Your Taxes
Also Check: How Much Are Taxes For Doordash
A Rise In Side Hustles
With over 31 million Americans becoming unemployed in 2020, a staggering number of people were looking for extra work in the gig economy or by side hustling. However, given this was the first time many of these individuals have worked as contractors, they may be surprised by the tax implications.Unlike working a job and getting a paycheck, income earned from gig economy work or through self-employment isnt subject to any tax withholding. Instead, you report your income and expenses at tax time and pay the IRS any tax due.Sadly, with most people working these gigs because they urgently needed the money, many may not have set any aside for taxes. If you didnt earn a lot of money , you wont owe much if anything. But if you were making good money on the side, you could have a substantial tax bill.
I Earned More Money This Year But Am Receiving Less In Taxes
Not unusual. There are many reasons that could result in such a situation and since this is a public forum you do not want to post your personal information.The only way to find out is to do a side-by-side comparison. Compare each item on your 2015 return with the corresponding item on your 2016 return.If you made more you will owe more, if your withholding was the same then your refund will be less.If you were routinely getting a large refund , I would suggest that you are having WAY to much money withheld in the first place –the IRS requires that your withholding equals your anticipated tax bill. The ideal situation is to have EXACTLY the correct amount withheld . Unfortunately that is a very difficult amount to predict, and is somewhat of a moving target due to salary increased/decreases and tax law changes. If you don’t mind paying a tax bill to the IRS you could set your withholding to be equal to, or little less than what you expect to owe –but there is risk of being under withheld and incur an IRS penalty. Probably the better option is to have slightly more than your anticipated tax bill withheld and then you would get a small refund –the smaller the better since you will have then had the use of the money all year .
Also Check: Ct Tsc Ind
A Long List Of Reasons Cut Into Refunds
James ORilley, CPA and tax director for Doeren Mayhew in Troy, said a variety of situations can come into play to trigger a smaller refund for someone’s 2021 tax return than their 2022 return.
- Many people went back to work last year after the short, but deep recession in 2020. Many who are back working are seeing higher wages, which even could put them in a higher tax bracket than prior year.
- The stock market performed well and many mutual funds paid out larger than normal capital gains and income distributions if the investor held the fund in a taxable account. This is income that people don’t see in their bank accounts.
- Unemployment compensation is taxable in 2021 and you could end up paying taxes on jobless benefits now. Last tax season, millions of people benefited from a temporary tax break that excluded a limited amount of unemployment compensation for those who qualified on 2020 returns.
- The advance child tax credit put money into wallets in 2021. Now, many people don’t realize the money was an “advance” of an expanded credit for 2021.
- Some taxpayers aren’t seeing an interest deduction for student interest for federal student loans because they didn’t make any payments in 2021.
The Standard Deduction Is Higher
The standard deduction — which is the amount you can decrease from your income before tax is applied — increased. For your 2021 tax return, the standard deduction is now $12,550 for single filers and $25,100 for married couples filing jointly . For heads of households, the standard deduction is now $18,800 . These increases are inflation adjustments.
Read Also: Amend Tax Return Online For Free
Frozen Student Loan Debt
When the pandemic shutdowns went into effect, the U.S. Department of Education froze all public student loan payments and stopped interest from accruing on student loan accounts. While this has been a great benefit to those who were struggling to pay them, it also means the $2,500 above-the-line deduction has been rendered worthless during the freeze. As a result, consumers have had more taxable income remain in their pockets, which, in turn, has led to them receiving a smaller tax refund.
That said, if you’ve been paying private student loans through services like SoFi or Laurel Road, your payments and interest haven’t actually stopped, so if you fall into this category, be sure to utilize this deduction on your tax return.
Free Tax Filing 202: Who Qualifies To Use Irs Free File
If your adjusted gross income was $73,000 or less in 2021, you can use free tax software to prepare and electronically file your tax return, according to IRS instructions online for the 2021 tax season.
Taxpayers who earned more can use Free File Fillable Forms, the electronic version of the federal tax forms, to file their tax returns online. Go to IRS.gov to learn more.
Recommended Reading: Taxes On Doordash
Income Tax Brackets Were Raised
Income tax brackets were also raised to account for inflation. Your income bracket refers to how much tax you owe based on your adjusted gross income, which is the money you make before taxes are taken out, excluding itemized exemptions and tax deductions.
While the changes were slight, if you were at the bottom of a higher tax bracket in 2020, you may have bumped down to a lower rate for your 2021 tax return.
Unclaimed Federal Tax Refunds
If you are eligible for a federal tax refund and dont file a return, then your refund will go unclaimed. Even if you aren’t required to file a return, it might benefit you to file if:
Federal taxes were withheld from your pay
You qualify for the Earned Income Tax Credit
You may not have filed a tax return because your wages were below the filing requirement. But you can still file a return within three years of the filing deadline to get your refund.
Also Check: How To Calculate Doordash Taxes
No Student Loan Interest
A popular tax deduction for the 43 million Americans with student loan debt is the student loan interest deduction. To claim this deduction, you must pay at least $600 in student loan interest during the tax year. You can only deduct up to a maximum of $2,500 in interest paid.The student loan interest deduction is an adjustment of your gross income. So if you earned $60,000 and paid $2,500 in student loan interest, youll only pay taxes on $57,500.However, due to the COVID-19 Student Loan Forbearance, federally-held student loans have been paused for all of 2020. These loans have had no payments, and interest has been 0%. As such, most Americans with student loans havent paid any interest for the entire year.The result? You might not qualify to deduct any interest on your taxes – thus increasing your tax bill.
Qualifying For The Earned Income Credit
To qualify for the earned income credit, you must have a valid Social Security Number . If your card or your spouse’s card says Not valid for employment and you received a SSN so you could get a federally funded benefit, you cannot claim the credit.
You must not use the Married Filing Separately filing status. You must be a U.S. citizen or resident all year, unless you file jointly, one spouse is a U.S. citizen or resident alien, and you choose to treat the nonresident spouse as a U.S. resident. You cannot claim the earned income credit if you deduct or exclude foreign income or housing on Form 2555, or if you have investment income of more than $3,650. In addition, you cannot be the qualifying child of another person.
TaxAct calculates your earned income credit based on your wages and other earned income, your adjusted gross income, and the number of qualified children you have living with you.
A common mistake is to forgo claiming a qualifying child for the earned income credit because you have agreed to let the noncustodial parent claim the dependency exemption for that child. The dependency exemption and a qualifying child for the earned income credit are two separate issues. Only the parent with whom the child lives the longest can claim a child for the earned income credit. If the time is equal, the parent with the higher adjusted gross income takes the credit.
You May Like: Door Dash Taxes
You May Now Be Eligible For A Stimulus Payment
There are several reasons you may now qualify for the third stimulus payment. To receive that amount, you must claim the Recovery Rebate Credit on your tax return.
Taxpayers whose income was higher in 2020 and did not qualify for the full stimulus payment, did not receive the full stimulus payment, but now that they’re filingtaxes for 2021, if their income has lowered they may qualify for an additional stimulus payment in the form of the recovery rebate credit, Dominguez said.
If you had a new child in 2021 , you may also be eligible for the Recovery Rebate Credit. Also, first time filers may not have received the credit.
Why Did My Tax Refund Go Down When I Added A W
If youre preparing your own tax return, its common to see your estimated refund go down when you add a W-2 for your second job or your spouses job. Heres whats happening.
Recommended Reading: Http Efstatus.taxact.com
Losing Certain Credits Or Deductions
In addition to the new cap on the SALT deduction, here are other commonly-lost credits and deductions if you:
- Have a child who turned 17 in 2021 and is no longer eligible for the Child Tax Credit
- Have older dependents, and this year’s higher standard deduction and/or $500 Credit for Other Dependents is giving you a lower tax benefit than last year’s personal and dependent exemptions
- Paid off your mortgage and can no longer deduct mortgage interest
Does Getting Unemployment Affect My Tax Return
As for jobless benefits, some social media buzz has been implying that the IRS is taking away money from people who received unemployment benefits.
For many, what’s happening is that temporary tax breaks for 2020 on unemployment compensation are no longer available on 2021 tax returns.
As part of the American Rescue Plan, many taxpayers were not required to pay taxes on up to $10,200 in unemployment benefits received in 2020. The exclusion was up to $10,200 of jobless benefits for each spouse for married couples.
Not everyone was covered by that temporary 2020 break.
The special provision to waive taxes on some unemployment income applied only to those who made less than $150,000 in adjusted gross income in 2020.
What’s confusing now: The tax break on jobless benefits which also extends to many state income tax returns, including Michigan only applied to 2020, not 2021.
Many people who are financially strapped when they lose a job often do not have taxes withheld. They could owe taxes when they file their 2021 income tax returns.
Don’t Miss: How To Get Your 1099 From Doordash
Why Do I Owe If I Didnt Owe Last Year
If you owe taxes that you didnt owe last year, it may be due to some changes in your life, such as:
Older Children A change that was made in the tax reform was the Child Tax Credit increase. It is $2,000 for children who qualify. Nevertheless, only children who were less than 17 years old at the end of the year will be able to claim the credit. Otherwise, you can only claim a $500 credit for the other dependents.
Job Changes Has there been any job change for you or your spouse? If so, a new Form W-4 should have been completed. If you made some changes in how you filed it, it may be why it affected your situation.
Side Job If you are a contract worker or freelancer, then you will have to pay quarterly taxes too. You will be responsible for keeping up with payments since you have no paycheck withholding. You may owe taxes to the IRS if you are a freelancer and you havent been paying the estimated quarterly taxes.
Income changes or students who were previously able to claim the American Opportunity Credit, yet became ineligible due to an enrollment status change may also affect the tax situation.
Filling Changes If you went through a divorce, marriage or you got a dependent, the filing status for which you are eligible and the way youre taxed can change. This might affect your tax bracket thats why you might owe taxes now.
Advance Child Tax Credit
One of the biggest reasons your tax refund might be smaller this year is because you’ve been receiving part of it all year long. The child tax credit – which is a big reason for a lot of tax refunds – can now be paid and claimed monthly.
The advance tax payments will be directly deposited to the checking account on record with the IRS. Parents can expect to receive $300 each month for every child under age 6 and $250 per month for children aged 6-17 .
If you’re not receiving it monthly , we have a guide here: How to claim the advance child tax credit monthly.
The result? When you actually file your taxes, you may receive a smaller amount than you’re used to.
Read Also: Do I Pay Taxes On Plasma Donations
How Has Tax Reform Impacted Withholding
However, in 2018 , the IRS repeatedly under-estimated the amount of withholdings for many taxpayers.
In December 2017 Congress approved Congress passed the Tax Cuts and Jobs Act. The bill was in effect for the first time in the tax year 2018 and which is to be paid on the 15th of April this year. Although it is referred to as tax reform, the TCJA concentrated on a trillion-dollar tax reduction.
In addition, the bill substantially reduced taxes for high earners and corporations as well as increasing the standard deduction to taxpayers of all income levels and also changed the tax rates and cutoffs of income in all tax brackets.
In light of these changes, to reflect these changes, the IRS changed its withholding tables for the year 2018. The agency reduced the amount that it took from the average workers salary. The result was that people were able to receive a little more of their earnings on an individual basis. According to reports, the IRS was instructed to make this change in order to make political decisions during the election year of 2018.
However however, the IRS has reduced its withholdings even more than previously. In the end, it is mainly estimated that the Government Accounting Office has estimated that as high as 30 million taxpayers were getting less than they should have received from their paychecks. In the final quarter of the year, theyd not yet paid all their taxes via biweekly withholding.