Credello: How to Prepare for a Bad Tax Surprise Following COVID Benefits

Few things in life are "free," particularly with the government. If you received federal Covid benefits last year, your tax return might take a hit in 2022. We're not talking about paying taxes on stimulus checks. Those were tax-free. It's areas like the advance child tax credit, student loan forbearance, and capital gains distributions where you'll take the hit.  

Some of the impact on your tax return will be due to economic recovery programs initiated by the government, so they're not a direct result of your own actions. Read this carefully before you consolidate tax debt. That debt may be larger than you made allowances for, so you'll need to adjust accordingly. Here are some of the reasons why: 

1. The Advance Child Tax Care Credit

The child tax credit (CTC) that you've become accustomed to receiving in one lump sum every year may have been partially paid out to you in monthly installments in 2021. The advance CTC allocated between $2,000 and $3,600 per child for children under 6-years-old and $3,000 per child for children ages 6-years-old to 17-years-old.  

The program called for half of the child tax credit to be distributed in monthly payments between July and December. Parents don't need to pay that back, but any amount they receive will be deducted from their normal tax return. Adjust your budget if this describes your situation. You already got that money in advance.  

2. Student Loan Interest Payment Deductions

Students are allowed to deduct their federal student loan interest payments on their tax return. That's not happening this year because federal student loans were in forbearance for the entirety of 2021. Payments were not required during the year and no interest was charged to students who voluntarily made payments on their federal student loans. 

The federal student loan forbearance program was scheduled to end on January 31st, but it's been extended through May 1st. Regular payments, interest payments, and pending collection actions will resume at that time. Keep that in mind when your tax return is deposited into your bank account. You might need it to get back on track.  

3. Capital Gains Taxes on Investment Distributions

The Federal Reserve Bank held interest rates at historically low levels to stimulate the economy during the 2020 pandemic and the year that followed. They're only just now talking about increasing them. Though not the only factor, low interest rates contributed to an active stock market in 2021. Investors reaped the benefits of this. 

If you sold any stock for a gain, you may need to pay capital gains tax and/or a net investment income (NII) tax on it. Capital gains tax rates for 2022 range from 0% to 20%, depending on how much you made. NII tax is 3.8% on top of that. The exact rates take the individual or family income into account, based on marital status.  

The Bottom Line: Tax Filing is More Complicated this Year

Like everything else in these times we're living in, tax filing will be different this year. Be prepared for smaller returns if you took any kind of Covid aid or if you made some money playing the stock market last year. Don't expect the same size tax return you got in the past. It could be a whole lot less than what you've become accustomed to.        

Reference: GoBankingRates

Source: Credello


Categories: Personal and Family Finances

Tags: Debt, Financial Services, Personal Finance

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