Refund and Other Reasons Why You Need to File a 2021 Tax Return
2021’s economic environment has been extraordinary for many U.S. taxpayers. 2021 has also been unusual in terms of new tax laws. These new rules may affect many taxpayers who wouldn’t ordinarily file a 2021 tax return. Income dollar limits alone can determine who must file a tax return. Why you need to file a 2021 tax return often turns on benefits.
Many “non-taxpayers” are affected by special tax legislation that may provide new incentives for filing. Filing the 2021 tax return may be necessary to get a “refundable tax credit or get an income tax refund,” as the IRS recently wrote in COVID Tax Tip.
Leaving a Financial Trail
Why do we have to file taxes? Leaving a financial trail is one important reason.
Filing time is a time many people get their financial records and files organized. Filing a return can help others step into your shoes in an emergency.
Shutting the Door to the IRS
There are rules aimed at shutting the door to old tax years, and the 2021 tax return will eventually be one of those years. The statute of limitations sets a time limit on the IRS claiming you owe taxes, interest or penalties. The limit is generally three years from your filing – or three years from the return’s due date. Underreporting income can extend this three-year rule.
While April 15th is the usual date for individual filings, the due date is April 18th for filing taxes 2021. Our tax rules permit limited extensions of taxpayer filing, but not payments.
Filing early is generally a good idea, but it doesn’t shorten the statute of limitations.
Don’t Shut the Door to Refunds
The statute of limitations can also work against you, if you are due a refund. According to the IRS:
There's no penalty for failure to file if you're due a refund. However, you risk losing a refund altogether if you file a return or otherwise claim a refund after the statute of limitations has expired. An original return claiming a refund must be filed within 3 years of its due date for a refund to be allowed in most instances.
So while you consider filing the 2021 tax return, also consider filing returns for recent years. Late returns can involve penalties if taxes are due.
Did You Have Withholdings Last Year?
If you worked hard and had wage withholdings in 2021, why do you have to file taxes? You may need to file federal and state returns to get your refunds.
You may be due a refund if you paid estimated taxes toward the 2021 tax return. Estimates were due April 15th, June 15th, and September 15th of 2021, and January 18th of 2022.
Did you have a refund due from 2020 taxes that you applied to the 2021 tax return? If yes, federal or state, you could be due a refund and need to file to get money back.
Earned Income Tax Credit
Earned income can yield a tax credit. This credit, however, isn’t available when earnings get too high. Income levels vary depending on your filing status and number of children.
- Married example: A married taxpayer filing jointly with three or more children could earn $57,414 or less in 2021 and qualify for some credit.
- Single example: A single taxpayer with no children could earn $15,980 or less and qualify for some credit.
The credit in the 2021 tax return ranges from $1,502 to $6,728 depending on filing status and how many children are claimed on the tax return. This credit is refundable.
An individual who does not have a qualifying child, and is not another’s dependent, is eligible if their principal residence is in the U.S. for more than half of the year. The individual (or spouse if filing jointly) must be at least 25 and under age 65 by December 31st.
So a good reason why you need to file a 2021 tax return is to receive your earned income tax credit refund!
Child Tax Credit or Credit for Other Dependents
Income tax filing 2021 for child tax credit or credit for other dependents has its own special form - IRS Schedule 8812 to the Form 1040.
The child tax credit is claimed if you have a qualifying child under the age of eighteen and meet the requirements.This increased credit is another good reason for income tax filing 2021. The initial child tax credit is $3,600 for each younger child who is not six by the end of 2021 and $3,000 for other qualifying children who are not eighteen by the end of 2021.
Other taxpayers may be eligible for the credit for other dependents, which can include children who are eighteen or older by the end of 2020. Parents and other qualifying individuals may lead to qualification for this credit.
To help in income tax filing 2021, the IRS has a special page to help people determine if they qualify for these two credits, Child-Related Tax Benefits Comparison - EITC Central.
Education Credits
Getting you and your family more educated is important. It can affect filing taxes 2021.
In the 2021 tax return, there is the American opportunity tax credit and the lifetime earning credit, both of which are higher education tax benefits that require filing Form 8863. See the IRS discussion at AOTC - American Opportunity Tax Credit - IRS and Lifetime Learning Credit - IRS.
The American opportunity tax credit can exceed your taxes. The lifetime learning credit can reduce taxes but can’t exceed your taxes. The taxpayer, spouse or their dependent must have a half-time or more student for at least half-time for one academic period in order to gain credits.
Each credit has its own rules in income tax filing 2021 but both require:
- You, the dependent, or a third party pay qualified higher education expenses;
- Enrollment at an eligible education institution; and
- You, your spouse or a dependent you list on your return is the eligible student.
Filing a joint return is usually tax-advantageous but the couple may prefer to file separately. Filing separately, when married, rules out this credit.
Look to receive an IRS Form 1098-T from the educational institution for tax-relevant information on this tax benefit.
Recovery Rebate Credit
If you did not receive a third Economic Impact Payment, you may be eligible for a recovery rebate credit in the 2021 tax return. You may need to file if you don’t receive the full amount. This credit can reduce taxes owed or yield a refund, but you need to file.
To Sum Up
Why do we have to file taxes? Who must file a tax return?
The simple answer is that any person may be required to file taxes during their lifetime – but filing taxes may offer financial benefits for you! The rules are complex and a tax professional can help you meet IRS and state requirements and reap benefits.
Filing taxes 2021 has its advantages too. Potential tax credits may yield refunds, even if no income was earned.
In addition, it is good to have your income tax filing 2021 for such reasons as closing the taxes-due statute of limitations and providing a financial trail in the event of an emergency. Filing time is a good time to get your financial records organized.
To sum up, a healthy tax refund is the “best” good reason why you need to file a 2021 tax return!