Picture this: For the past few years you’ve received your tax return and have had a small but nice refund. Now imagine your surprise when, this year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to you as it is to hear it. Here are some situations to watch for that can increase your tax liability:
New tax laws. The multiple bills passed to pay out assistance from government programs must now be accounted for on this year’s tax return. While the goal of the legislation is to reduce taxes, there are several changes that could cause you to pay more taxes, including:
- Repayment of duplicate economic stimulus checks.
- New taxability of unemployment benefits.
- Accounting for any small business loan and grant benefits.
- The need to take required minimum distributions once again in 2021.
A child is no longer eligible. This year’s child tax credit is a big increase versus prior years. But if you already received the money through the advance child tax credit payment system, it will impact your refund this year. And as children get older, they grow out of lots of things — clothes, interests and tax credits. Here are some age requirements for popular tax benefits:
- Child and Dependent Care Credit: under age 13
- Child Tax Credit: over age 17
- Earned Income Tax Credit: under age 19 (24 if a qualified student)
Earnings with Social Security benefits. If you are recently retired, start collecting Social Security Benefits, and then begin working part-time, you are also in for a tax surprise. These extra earnings could not only make your Social Security benefits taxable, it could result in a reduction of benefits received.
Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth or becoming the head of household, others might surprise you and result in additional tax. Other common life events include retirement, death and entering/leaving school.
Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.
Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2021. By doing so, perhaps a planned pleasant surprise can be in store for you.