Internal Revenue Service Update
Service may be part of IRS’s official name… But the agency has been lacking this lately.
It’s not all IRS’s fault. Credit the perfect storm of the coronavirus pandemic, lots of tax law changes, new relief programs for the agency to administer, years of budget cuts, and a shrunken workforce for the historic declines in the level of service by IRS to taxpayers and tax practitioners in 2020 and 2021.
For the 2021 filing season, millions of individuals still await refunds from timely filed 2020 tax returns. As of Sept. 18, IRS had a backlog of 7.8 million individual returns that require manual processing. Some need further review because of mistakes with refundable credits or math errors. About 9 million math error notices were mailed to taxpayers from June 1 through July 15, compared with 628,997 for the same period last year. Others are paper returns filed this year that need to be manually processed by IRS. The good news is that IRS is making progress on processing returns. As of June 25, there were 16.7 million 2019 and 2020 Forms 1040 waiting for action.
Amended-return filers also need lots of patience this filing season. As of Sept. 18, IRS had more than 2.8 million Forms 1040-X yet to process. Unfortunately, there’s not much you can do if you’re affected by the delay, other than continuing to check the “Where’s My Refund” tool on IRS’s website.
Want to call IRS for help with a tax question or to check on your refund?
You will be one of the lucky few if you can actually reach a live person. So far in 2021, only 9% of callers reached a live customer service representative. One reason for this dismal level of service is the historic number of callers. IRS has received over 200 million calls on its various phone lines so far in 2021, more than five times the usual number. In addition to the normal callers every year, people are calling IRS often and repeatedly about their delayed refunds, the status of their stimulus payments or monthly child tax credit payments, how to account for the numerous retroactive tax changes, and so much more.
Identity Theft Warning Signs
With identity thieves continuing to target the tax community, the IRS is urging you to learn the new signs of identity theft so you can react quickly to limit any damage.
Common signs of ID theft
- In early 2020, you receive a refund before filing your 2021 tax return.
- You receive a tax transcript you didn't request from the IRS.
- A notice that someone created an IRS online account without your consent.
- You find out more than one of your tax returns were filed using your SSN.
- You receive tax documents from an employer you don't know.
If you discover that you're a victim of identity theft, consider taking the following actions:
- Notify creditors and banks
- Place a fraud alert on your credit report
- Report the theft to the Federal Trade Commission (FTC)
Ideas to Lower Your 2021 Tax Bill
Here are some ideas to help you begin tax planning for your 2021 return.
- Contribute to retirement accounts: Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can stash away between now and December 31. You can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). If you're age 50 or older, that number jumps to $26,000.
- Contribute directly to a charity: If you don't have enough qualified expenses in order to itemize your deductions, you can still donate and cut your tax bill. For 2021, you can reduce your taxable income by up to #300 if you're single and $600 if you're married by donating.
- Increase daycare expenses: Consider using a daycare if you and your spouse both work. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in your daycare expenses while cutting your tax bill by $8,000. In order to receive the full tax credit, your adjusted gross income must not exceed $125,000.
- Contribute to an FSA or an HSA: If you have a flexible spending account, you can contribute up to $2,750 in 2021. This allows you to pay for medical expenses in pre-tax dollars. Unspent funds in an FSA account can now be rolled from 2021 to 2022. If you have a health savings account, you can contribute up to $3,600 if you're single and $7,200 if you're married.
Good Debt Versus Bad Debt
Knowing the difference between good and bad debt can change the way you look at your spending.
Good debt adds value
Good debt often leads to financial growth, because the product or service being purchased adds more value than the debt that comes with it. Student loans are usually an example of good debt because the related education allows you to earn more income. Taking on a mortgage is another example of good debt. It gives you access to a place to live all while building equity. Good debt often comes with a tax deduction on the interest you pay on things like your mortgage or student loans.
Bad debt adds expense
Bad debt often does not contribute to personal financial growth. An example of bad debt would be credit card debt. Interest rates on credit cards are higher than most other types of debt. In fact, interest expense is so high that credit card companies are now legally required to display the cost of this debt directly to their billing statements. Auto loans are another good example of bad debt. Cars usually lose value quickly, often leaving more money owed on the debt than the car is worth.
Comparing the cost of the purchase with interest, to the value you stand to gain by purchasing the asset, can help you to determine whether using debt is a good or bad choice for you.