How to Maximize Your Tax Refund (and Avoid Tax Penalties), Courtesy of the Money Confidential Podcast
For many people, taxes are intimidating. With all the complicated rules and jargon, filing taxes can sometimes feel like taking the exam without taking the class. But a filing mistake can result in much worse than a bad grade on a test—it can land you a massive bill from the IRS. On this episode of Money Confidential, we're here to help you stay knowledgeable on the latest tax code updates and avoid making costly mistakes.
For the second installment of our "Taxes in Ten" series, we talked with Jada (not her real name), a 40-year-old public service worker who adjusted her tax withholding to increase her take-home pay and pay down her debt faster. While the under-withholding did allow her to make progress on her debt, she had also avoided filing her taxes for two years, and the penalties that came later brought her total debt balance to even more than where she'd started.
Money Confidential host Stefanie O'Connell Rodriguez tapped Kristin Myers, editor-in-chief of The Balance, and Caleb Silver, editor-in-chief of Investopedia, to explain what's new with taxes this year and how to maximize your tax refund while also avoiding penalties.
Staying organized with your records and filing correctly can be complicated enough, but tax season is made all the more tricky by the constantly changing rules and laws.
"So many changes have been happening in the tax code," Myers says. "One of the first things would be those standard deductions. They jumped up to $12,550 if you were a single filer, over $25,000 if you're married, and it was over $18,000, almost $19,000, if you were filing as a head of household."
Income tax brackets have also been undergoing some changes. "You're going to want to check out what those new income tax brackets are because it might mean that you actually aren't in the tax bracket that you thought you were," Myers says. "Perhaps you might be paying a little bit more in taxes. You might also be paying a little bit less."
Another thing to look into, if you're a parent, is the child tax credit, which increased rather drastically. For the 2021 tax year, taxpayers can get up to $4,000 back for one child, and $8,000 back for the care of two or more. (In prior years, the maximum return for the credit was $1,050 for one child or $2,100 for two or more.)
"For qualifying families, if you did get that childcare tax credit payment you gotta make sure that you compare that with what you can actually claim on your tax return," Silver says. "So, if you see less than you're eligible [for], you can claim a credit on your 2021 return. And eligible families who didn't get the monthly advanced payments in 2021 for some reason, can get the lump sum payment on that childcare tax credit when they filed their return this year."
A less positive change this tax season is the lack of relief for those who received unemployment benefits. "So, in 2020, if you were receiving unemployment because of the pandemic, you actually got a tax break," Myers says. "Typically, you have to pay tax for those unemployment benefits that you received. Unfortunately, in 2021, that tax break was essentially taken away. So, you are going to have to pay taxes on those unemployment benefits again."
Though the tax codes are constantly changing, you don't have to head into the next tax season unprepared. Staying informed about the current and upcoming changes, while also considering the tax implications for the changes in your own life, can set you up for better success come tax time.
"If you've made a life change in the past year or you're planning one this year, you're changing jobs, you're retiring, maybe you're getting a divorce, maybe you're getting married—each one of those has tax implications, but you got to familiarize yourself with what those are before you take those steps because those should be factored into any decision you're making," Silver says. "There are a lot of tax breaks out there that a lot of people don't know about. And there are a lot of tax burdens out there that folks don't know about. So, every time you're about to make that significant change, always consider what that might mean from a tax standpoint."
To stay up to date on all that's new this tax season, check out episode two of Money Confidential's six-part series, "Taxes in Ten: How do I avoid penalties and maximize my tax refund?" on Apple podcasts, Spotify, Amazon, Player.FM, Stitcher, and wherever you get your podcasts.