Introduction – The Tax Year-End is Nigh!
It is that time of the year when we look back, take stock and ask ourselves: did we abide by all the New Year resolutions we made? Did we fulfil all the promises we made to ourselves? It is also the time when the taxman comes calling. We will now know how well our tax planning actually was. The US tax year 2021 will come to an end soon and a new tax year beckons to us. Let’s see how one can meet the tax deadline of 2021 unfazed and prepare for the tax year 2022.
For the Tax Year 2021
Two important deadlines you need to meet are: January 18, 2022 and April 18, 2022. You have to pay the final installment of estimated tax payment by January 18, 2022. Alternatively, you can file your return and pay the final installment by January 31, 2022 and avoid paying penalties and interest for delayed payment. With changes in your lifestyle, like getting married or having children during the year, there could be a change in your filing status. You would have got your hands on an additional income that you had not anticipated. This would leave you with either a higher tax outgo to be paid now or a refund.
April 18, 2022 – the tax day – is the last date for filing your tax return. As an individual, you will be required to file form 1040 or 1040-SR if you are over 65 years of age – the same two forms are also meant for resident aliens. If you are unable to do so, you can seek an automatic extension of six months (till October 17, 2022) by applying for the same in form 4868. Mind you this extension is only for filing your return and does not cover tax payment.
You should invariably pay your tax by the April 18, 2002 deadline to avoid penalties and interest. If extension for filing return is not sought, you could be liable for penalties which are higher than those for non-payment of taxes.
If you have any financial or bank accounts in other countries, you will need to file Foreign Bank and Financial Accounts (FBAR) – FinCEN Report Form 114 along with your return.
State Taxes
In addition to the Federal taxes, you would have to pay State taxes in the US also, unless you are staying in the nine States which do not tax income. These tax-free states in the US are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
New Hampshire, however, levies taxes on investment income such as interest and dividends. The different States have different tax rates and tax brackets as also exemptions of their own varying with the Federal requirements.
Generally, for individuals, the deadlines for State taxes are the same as Federal taxes. State tax returns can be e-filed only in conjunction with Federal tax returns, except in the case of California where you can file the State return alone.
There are other factors which you should be aware of.
States which tax income and have borders with non-taxing States have some kind of reciprocal arrangements. For instance, Massachusetts has a 5% state income tax. In October 2020, it adopted an emergency law to tax employees who previously travelled from New Hampshire but were working from home following the pandemic. Since New Hampshire does not tax wages, it sued Massachusetts. But, in June 2021, the U.S. Supreme Court struck down the New Hampshire’s challenge to the Massachusetts law.
Filing Returns
Now that you know by when you need to pay taxes and file returns, the next question would be how to file your returns?
The IRS assures you of faster processing and refunds if you file electronically or ‘e-file your return’ through the IRS website. You will get your refund within three weeks of filing, and even faster if you provide your bank account details for direct credit to your account.
A paper based return sent by post may take about six to eight weeks for processing. If you owe any balance tax, you could pay through IRS Direct Pay electronically. Else, you will have to pay by money order or a check, made out to “United States Treasury,” and post it to the address given in the form you filled in.
If, for any reason, you are unable to pay your balance tax in full, the IRS has different arrangements for making it easier for you to make payments either through short term payment plans (up to 180 days) or an installment plan. The IRS also advises you to consider taking a loan or pay through credit card so that you can save on the penalties and interest that would accrue under the Internal Revenue Code.
For the tax year 2022
Your tax liability depends on the amount of income you would be reporting and your filing status. Filing status is based on your situation on the last day of the tax year i.e., December 31.
If you get married in December of 2021, you are treated as being married for the entire year 2021 for the purpose of tax. The following are the five filing statuses described briefly:
Single – when you are either unmarried or considered unmarried on December 31;
Married filing jointly, Married filing separately – when you are considered married and can opt for filing returns either singly or jointly;
Head of household – when you have a qualifying dependant and pay for the upkeep of your home for more than six months in the year; and
Qualifying widow(er) – On the death of your spouse, you can file under married filing jointly status for the year of death only. If you remain unmarried and are taking care of your home and dependent child, you can file returns for the next two years under Qualifying Widow(er) status for which the tax rates are the same as married filing jointly status. After the two year period, you can file under Head of Household.
There are conditions and exceptions to these statuses which you need to go into in much greater detail as more than one of these statuses may apply to you. You can choose the one which gives you a tax advantage.
After you have decided your filing status, the next step would be to find the tax bracket you will fall into. The tax brackets for 2022 filing status-wise are:
2022 Single Filers
| Taxable income is: | Tax due is: |
| Not over $10,275 | 10% of the taxable income |
| Over $10,275 but not over $41,775 | $1,027.50 plus 12% of the excess over $10,275 |
| Over $41,775 but not over $89,075 | $4,807.50 plus 22% of the excess over $41,775 |
| Over $89,075 but not over $170,050 | $15,213.50 plus 24% of the excess over $89,075 |
| Over $170,050 but not over $215,950 | $34,647.50 plus 32% of the excess over $170,050 |
| Over $215,950 but not over $539,900 | $49,335.50 plus 35% of the excess over $215,950 |
| Over $539,900 | $162,718 plus 37% of the excess over $539,900 |
2022 Married Filing Separately
| Taxable income is: | Tax due is: |
| Not over $10,275 | 10% of the taxable income |
| Over $10,275 but not over $41,775 | $1,027.50 plus 12% of the excess over $10,275 |
| Over $41,775 but not over $89,075 | $4,807.50 plus 22% of the excess over $41,775 |
| Over $89,075 but not over $170,050 | $15,213.50 plus 24% of the excess over $89,075 |
| Over $170,050 but not over $215,950 | $34,647.50 plus 32% of the excess over $170,050 |
| Over $215,950 but not over $323,925 | $49,335.50 plus 35% of the excess over $215,950 |
| Over $323,925 | $86,127 plus 37% of the excess over $323,925 |
2022 Head of Household
| Taxable income is: | Tax due is: |
| Not over $14,650 | 10% of the taxable income |
| Over $14,650 but not over $55,900 | $1,465 plus 12% of the excess over $14,650 |
| Over $55,900 but not over $89,050 | $6,415 plus 22% of the excess over $55,900 |
| Over $89,050 but not over $170,050 | $13,708 plus 24% of the excess over $89,050 |
| Over $170,050 but not over $215,950 | $33,148.50 plus 32% of the excess over $170,050 |
| Over $215,950 but not over $539,900 | $47,836.50 plus 35% of the excess over $215,950 |
| Over $539,900 | $162,218.50 plus 37% of the excess over $539,900 |
2022 Married Filing Jointly
| Taxable income is: | Tax due is: |
| Not over $20,550 | 10% of the taxable income |
| Over $20,550 but not over $83,550 | $2,055 plus 12% of the excess over $20,550 |
| Over $83,550 but not over $178,150 | $9,615 plus 22% of the excess over $83,550 |
| Over $178,150 but not over $340,100 | $30,427 plus 24% of the excess over $178,150 |
| Over $340,100 but not over $431,900 | $69,295 plus 32% of the excess over $340,100 |
| Over $431,900 but not over $647,850 | $98,671 plus 35% of the excess over $431,900 |
| Over $647,850 | $174,253.50 plus 37% of the excess over $647,850 |
There are two ways by which you can reduce your taxable income. One is through standard deduction or through other itemized deductions. Essentially, the standard deduction is a lump sum amount you could deduct from your total income for each of the filing statuses.
For single filers and married filing singly, the standard deduction is $12,950; for married couples filing jointly it is $25,900 and for the head of household filers it is $19,400. The standard deduction for single filers above 65 years is $13,700 and for joint filers above 65 years is $28,700.
However, certain filers cannot avail themselves of the standard deduction. These include married single filers if their spouse is itemizing deductions or those filers whose tax year is less than 12 months.
If you are opting for allowed itemized deductions, you can add up your contribution to charities, local state taxes and property taxes, certain medical and dental expenses, mortgage interest, etc. Only if these, in total, are greater than your eligible standard deduction, would it make sense to itemize deductions.
Here’s an interesting fact: The IRS allows you a standard medical mileage rate of $0.16 per mile for your trips to your doctor, pharmacy, etc. which you can add to your itemized deductions.
Dates to remember:
Estimated Tax Payments (Form 1040-ES): If your tax payment for 2022 is not completely paid through withholding, estimated tax payments are due on the 15th day of the fourth, sixth, and ninth months of your tax year and on the 15th day of the first month after your tax year ends.
The first instalment is due on: April 18, 2022
Second on: June 15, 2022
Third on: September 15, 2022 and
The last instalment will be due on January 15, 2023. Since it falls on a Sunday and January 16, 2023, is also a Federal holiday on account of the birthday of Martin Luther King, Jr., the due date could be January 17, 2023.
If you have obtained an automatic six-month extension for filing returns, you will have to file form 1040 or 1040-SR by October 17, 2020 and pay all due taxes, penalties and interest.
You will find that there are a lot of ifs and buts when you are trying to make sense of the tax rules – things you were not aware of, things you could not expect and things you could lose out on. We will be happy to help you navigate through the intricacies of tax planning and filing returns.