Last-minute tax tips, and how to prepare for new requirements if you receive payments via apps

The tax-return filing season is in full gear, with plenty of people still looking for last-minute money-saving tips and others questioning whether they need to file.

In addition, there are some important changes coming up for next year's filing season that could affect a lot of people.

Here are some of the usual tax-tip reminders, along with some timely updates:

Reasons to file, even if not required

Not everyone needs to file a federal tax return, but there are reasons to do so, especially this year. In general, you need to file only if your adjusted gross income exceeds the standard deduction for which you would qualify — $12,550 for singles under 65 and $25,100 for married couples, for example. The instructions to IRS Form 1040 provide more details.

Yet a growing list of “refundable” tax credits are available even to people who don’t owe any taxes, including some that might end after the 2021 tax year. These credits “have the potential to result in a net payment to the taxpayer,” noted Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Here are some of the key refundable credits and other reasons to file:

• The ability to recover excess withholding. If you had more money withheld from a job or other income source than your tax bill for the year, the only way to get the money back is by filing a return, Luscombe said.

• The Earned Income Tax Credit. This benefit is designed to “reward taxpayers for working,” said Luscombe, who noted that the credit was significantly expanded for 2021, especially for people who don’t have children.

• The Child Tax Credit. This one was partially refundable for years but was enhanced in 2021 while also becoming fully refundable. However, if you received more advanced credit payments last year than you were entitled to claim, you might need to repay some or all of the excess.

Other credits that are at least partially refundable for 2021 include the American Opportunity Tax Credit (for education expenses), the Child and Dependent Care Credit, the Premium Tax Credit (certain health insurance costs) and the Health Coverage Tax Credit.

A less-familiar retirement incentive

Brokerages and other investment firms typically have plenty of educational material to help you select Individual Retirement Accounts and the like, but they don’t seem so keen on promoting the Saver’s Credit. In part, this is because the credit applies to lower-income individuals — not their bread-and-butter upscale clients.

Whatever the reason, only 48% of U.S. workers are aware of this tax break, formally called the Retirement Savings Contribution Credit, according to a survey by the Transamerica Center for Retirement Studies.

Nor is the credit especially valuable. It applies to up to $2,000 of voluntary contributions a taxpayer makes to a traditional or Roth IRA and certain other accounts. The actual tax benefit is a fraction of that and varies depending on income and more. The maximum credit is $1,000 or 50% of a $2,000 investment per person ($2,000 for married couples).

Still, the credit is in addition to other tax benefits, such as deductible contributions in the case of traditional IRAs and tax-free withdrawals on Roths. Many people might not know this is an additional incentive.

"The idea of a double tax benefit sounds too good to be true,” said Catherine Collinson, president and CEO of the Transamerica Institute.

Among drawbacks, the credit isn't available to full-time students or those who can be claimed as a dependent. Nor is it refundable, like others discussed above.

IRAs a last-minute tax break, for some

Contributing to a traditional IRA is itself one of the few planning tips still available for individuals seeking to cut their tax liabilities for 2021.

“Eligible individuals who did not save for retirement last year can contribute to an IRA until April 18, 2022, for tax year 2021 — and may be able to claim the Saver’s Credit,” Collinson said.

This filing season, more people might fall under the income limits for traditional or Roth IRAs if they lost their jobs in 2021 or voluntarily took some time off. Eligibility — and the amount you can deduct in traditional IRAs — depends largely on your income and whether you or your spouse are covered by workplace retirement programs. Details are available at irs.gov.

Relatively few people contribute new money to any types of IRAs. Confusion over eligibility is a major impediment, and many workers prefer to direct their dollars to workplace 401(k) and other plans that offer employer matching funds. IRA balances are growing, but this largely reflects transfers or rollovers from 401(k) and similar programs.

Get ready for tighter reporting

Here’s a cumbersome new tax rule that will affect a lot of people going forward: Money you receive on various payment-processing apps now will be reported to the IRS, and you will receive a Form 1099-K, if your gross proceeds exceed $600 annually. The rule doesn't impose new taxes but is designed to tighten income reporting.

“This is going after self-employed people, gig workers and those with side hustles,” said Marc Lamber, an attorney at Fennemore Craig in Phoenix. Through increased voluntary tax compliance and greater awareness of existing rules, the IRS expects to bring in another $1 billion in revenue next year, he said.

The new rule will apply on payment apps including Venmo, PayPal and CashApp but not Zelle, which isn’t a payment app but, rather, a processor of interbank transactions.

One caveat is that you could receive a 1099-K next year for nontaxable personal transactions such as gifts or if you received money from a travel buddy for his or her share of your cruise cabin, or if you took a payment from friends for a joint dinner.

As a general rule, transactions between family members and friends aren't taxable, but you still might receive a 1099-K that may need correcting, Lamber said. That’s why it’s important to start keeping good records now rather than waiting until next year's filing season.

Then again, some taxes could apply on transactions that you might view as personal, such as if you sold a rare coin, piece of art or even a used car at a profit.

Should IRS ease penalties midstream?

Taxpayer-advocate groups and those supporting return preparers have called on the IRS to ease penalties as the agency continues to grapple with pandemic-related backlogs. Congress has taken note with proposals such as the Taxpayer Penalty Protection Act, or House Bill 5155, which would waive some penalties if, for example, individuals paid at least 70% of their tax due in the current year.

However, retroactive, mid-season tax changes can cause headaches for the public, tax-return preparers and the IRS and add to the backlog problem, argues a group that represents managers in the IRS and other federal agencies.

“It is the job of Congress to pass legislation, which executive-branch agencies such as the IRS will gladly execute,” said Chad Hooper, executive director of the Professional Managers Association, in a statement. But calling on the IRS to do so in the middle of the filing season can be highly disruptive, he added.

Enacting legislation such as this would require entire IRS departments to halt their current work and switch gears. And if taxpayers are affected by changes after they filed returns, they might need to file amended returns, further muddling the process.

“This causes severe delay and confusion and dramatically increases the potential for errors — making the tax filing season more challenging for everyone involved,” Hooper argued. He is encouraging Congress to pass tax bills that take effect down the road, not retroactively.

Reach the reporter at russ.wiles@arizonarepublic.com.

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This article originally appeared on Arizona Republic: Tax incentives to know, and how to prepare for new rules on apps