As millions of Americans prepare to file their annual federal income tax returns, a new survey from NerdWallet finds that lifestyle changes, new tax laws and misconceptions could throw them for a loop.
Incomes have gone up and down, people have moved from state to state, they’ve collected unemployment and child tax credit payments, started freelancing and begun investing, according to the survey conducted online by The Harris Poll from Dec. 13-15, 2021. Not only can these changes affect the complexity of filers’ returns, but they could impact their bottom lines.
“The last year has been a time of transition for many Americans. A lot of those changes, including moving to a different state, leaving a job, or getting married, can have a big impact on your taxes,” says NerdWallet personal finance expert Kimberly Palmer. “Understanding those details in advance can make it easier to navigate tax return season, and help you avoid potential penalties.”
Note: Throughout the report, “filers” refers to Americans in our survey who said they plan on filing or did file a federal tax return for the tax year specified.
Anticipated tax bills are higher than anticipated refunds. Filers expecting to owe when they file a 2021 federal return anticipate a $3,479 bill, on average. Filers anticipating a refund expect $2,221.
Taxpayers take action to reduce liability. Nearly three-fourths (72%) of 2021 filers said they had taken or would take steps to lessen their tax bill. This is up from 65% among 2020 filers.
Recipients are confused about child tax credit payments. More than 2 in 5 (44%) of Americans who received advance child tax credit payments in 2021 believe those payments are taxable, according to the survey. While those payments won’t be taxed, filers will have to account for them. If filers received more than they were due, they may have to return the overpayment.
Changes in amounts and sources of income abound. One-third (33%) of Americans say their household income decreased, 26% said their household income increased, 11% started freelancing or doing gig work and 12% report receiving unemployment benefits in 2021. Any one of these changes could impact the outcome of a taxpayer’s return.
Refund expectations are steady, while tax bill expectations are high
About half (51%) of Americans filing 2021 federal income tax returns this year are expecting a refund. That’s on par with findings in the past two years (51% for 2019 and 50% for 2020). And they’re expecting to receive refunds that are roughly comparable in size to previous years’ expectations — $2,221 on average, compared to $2,207 for 2019 and $2,032 for 2020, according to the survey.
When asked how they plan to use their refund, 42% of those expecting one said they’ll put money into their savings. This marks the third year we’ve asked this question, and the third year savings was the top destination for refunds.
Nearly one-fourth (23%) of those filing a 2021 return expect to owe additional federal taxes — $3,479, on average. That’s up from $2,781 among 2020 filers expecting a bill, and $2,667 among those 2019 filers.
Numerous factors could impact 2021 returns
Nearly three-fourths (72%) of people planning to file a 2021 federal tax return say they took steps or will take steps to potentially reduce their 2021 federal tax bill or reduce what they owe overall. This is up from 65% the year prior.
Millennial filers are more likely to take such steps (82%) compared to 75% of Gen Z, 72% of Gen X and 65% of baby boomers.
But even those who didn’t take intentional steps to reduce their tax burden may find this year’s tax outcome different, due to changes in their personal lives and those brought about by the pandemic economy.
One thing working in filers’ favor: adjustments made by the IRS to counteract the effects of decades-high inflation. Only 37% of Americans know that income tax brackets are commonly adjusted to account for inflation, according to the survey. The IRS typically makes tax bracket adjustments and other changes to account for inflation annually.
Child tax credit
Taxpayers with children and under a certain income threshold can qualify for a child tax credit, which reduces their tax bill dollar for dollar. In 2021, the child tax credit was expanded from $2,000 per child to $3,600. And for the first time ever, qualified taxpayers could receive part of the credit in advance, through monthly payments that began in July 2021.
The IRS sent out billions of dollars in payments, but those who received them may not be fully aware of their impact when it comes time to file.
Of those who received advanced child tax credit payments in 2021, 44% believe those payments are taxable, according to the survey. This isn’t the case, but recipients may have to “settle up” when it comes time to file. The IRS based these payments on 2020 tax return data, so a 2021 change in income or the number of qualifying dependents, for example, could have resulted in an overpayment.
“While receiving the child tax credit payments in advance was a much-needed lifeline for many families, it can also make filing taxes for 2021 a bit more complex. Recipients will need to account for those payments and, if they received more than they were due, pay it back,” Palmer says.
Taxpayer tip: Taxpayers eligible for a child tax credit will need to reconcile what they’re eligible for with any amounts they’ve already received throughout 2021. The advance payments were designed to account for half of your credit for the year. Those who received an advance payment should have received a letter from the IRS containing helpful information to use at filing time, including the total amount that was paid out. If you’ve misplaced the letter or didn’t receive it, access your payment information on the Child Tax Credit Update Portal.
Income changes, freelancing and unemployment
Your income has a dramatic impact on your tax burden. When you change jobs, pursue self-employment or collect unemployment, the outcome of your return can change, too.
One-third (33%) of Americans say their household income decreased in 2021 — 22% cited the pandemic’s effect and 11% cited unrelated events as causes. But about one-fourth (26%) say their income increased. These changes could place filers in a different tax bracket, make them eligible for additional credits or result in underpayment and a subsequent tax bill.
In addition, many Americans took on gig work — 11% started freelance work, according to the survey. In freelance situations, taxes often aren’t withheld from pay, which means workers new to freelancing who didn’t pay estimated taxes themselves throughout the year may be surprised at what they owe.
Despite record low unemployment, 12% of Americans report receiving unemployment benefits at some point during 2021, and many may be unclear on how to handle them come tax time. In fact, 15% of those who received unemployment benefits don’t believe those benefits are taxable, according to the survey.
Historically, all unemployment has been taxable. However, the American Rescue Plan Act of 2021 changed how that tax works. The first $10,200 in benefits for people with adjusted gross incomes of $150,000 or less is not taxable. As of Nov. 1, 2021, the IRS issued some $14.4 billion in refunds on unemployment taxes paid before the rescue plan was enacted.
Taxpayer tip: If you’re not using a professional tax preparer, tax software can help ensure you’re filing an accurate return, no matter how your income changed. IRS Free File allows taxpayers with incomes of $73,000 and below to file their federal return online using free software. Navigating to the IRS Free File website will connect you to companies offering this service. If you don’t qualify for free online filing, several tax software companies offer packages at a variety of price points, depending on the complexity of your return.
An estimated 12.9 million Americans — or 5% — report moving from one state to another in 2021, according to the survey. Moving complicates everything, including your income taxes. In most cases, if you were a resident and earned income in a state, you must file there. So if you were a resident of and earned income in two states, that means filing two state income tax returns.
About 1 in 10 (11%) Americans believe you aren’t likely to be responsible for filing in two states if you move to one mid-year, according to the survey.
Taxpayer tip: State tax laws (and how a state defines residency) vary, sometimes widely. Tax software will walk you through a process to determine where you need to file and pay taxes. However, if you’re uncertain, contact the state’s department of revenue for clarification. Failing to file a state return when it’s required can result in hefty fees, penalties and interest.
Nearly one-third (31%) of 2021 filers made or planned to make charitable contributions to reduce their federal tax bill, according to the survey. And 13% of Americans say they started contributing or increased contributions to charities in 2021.
Before 2021, only filers who itemized could deduct donations to charities. Now, however, even those who take the standard deduction can write off up to $300, or up to $600 if they’re married and filing jointly.
Taxpayer tip: To claim charitable donations as a deduction, the recipient of your gift must be approved by the IRS. Use its Tax Exempt Organization Search tool to double-check before filing. If you hope to deduct more than the $300 or $600 limit, you’ll need to itemize your deductions, and just how much is deductible varies by contribution type and the organization.
“Getting familiar with how different life changes could potentially impact your tax return will make it easier to file your taxes on time and avoid penalties for mistakes or underpayments,” Palmer says. “You don’t have to be a tax law expert, but reviewing the basic concepts of federal and state income taxes, deductions and tax credits can help you avoid costly surprises later.”
This survey was conducted online within the U.S. by The Harris Poll on behalf of NerdWallet from Dec. 13-15, 2021, among 2,051 U.S. adults ages 18 and older, among whom 1,644 will file a 2021 federal tax return. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Sarah Borland at [email protected].
The number of Americans who moved from one state to another in 2021 calculated using the U.S. Census Bureau’s adult population estimate as of July 1, 2021, the most recent available.
NerdWallet defines generations as Generation Z, ages 18-25; millennials, ages 26-41; Generation X, ages 42-57; and baby boomers, ages 58-76.
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