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How to Start Preparing For 2021 Tax Season NOW - YouTube
Channel: Logan Allec
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all right everybody logan alex cpa here
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today's video
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is all about how you can prepare for
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next year's tax season
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now
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i know the end of the year is still a
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couple months or so away but i hate to
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break it to you
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here's the facts
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if your tax planning begins a couple
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weeks before april 15th then you're
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doing it wrong if you are serious about
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minimizing your tax liability and being
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proactive about your tax situation
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rather than playing the refund guessing
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game next april you need to prepare for
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next year's tax season now
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at a basic level this means doing things
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like checking your tax withholdings and
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adjusting your form w-4 if necessary uh
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making a list of all the companies such
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as your employer your bank your stock
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broker from whom you are expecting to
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receive a tax form next year and
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considering increasing your
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contributions to your workplace 401k or
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other tax advantaged retirement plan at
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a more advanced level this means
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thinking ahead about what tax deductions
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and credits you may be eligible for on
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your 2021 tax return and taking steps
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now to maximize those benefits i'm going
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to talk about some specific benefits in
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this video and how to maximize them but
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before we get into all that
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it's important that you understand what
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tax deductions and tax credits are
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and what they're worth to you because
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we're going to be talking about a lot of
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them in this video so let's start with
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defining what tax deductions and tax
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credits are
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because you need to understand that to
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understand the rest of the video so
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let's get these terms straight right off
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the bat a tax deduction is a tax benefit
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that reduces the amount of your income
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that's subject to tax so let's say
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you're single and your taxable income is
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nine thousand dollars without a
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particular deduction because you're in
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the ten percent tax bracket your tax
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liability for the year would be nine
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hundred dollars but wait
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you forgot about that 1098 e from your
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student loan servicer you dig it up it
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says you paid a thousand dollars in
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student loan interest because you're
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eligible for the student loan interest
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deduction your taxable income is now
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eight thousand dollars that's your
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original nine thousand dollar taxable
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income minus the one thousand dollar uh
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student loan interest deduction so
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what's your tax liability now your
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liability is now eight thousand dollars
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times ten percent or eight hundred
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dollars so how much actual tax benefit
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dollars back in your pocket did that
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deduction provide you one hundred
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dollars that's the difference between
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your old tax liability and your new tax
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liability therefore in general the
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actual tax benefit afforded to you by a
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particular tax deduction is the amount
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of the deduction itself multiplied by
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your marginal tax rate which is
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generally the tax bracket you are in
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unless the deduction moves you into a
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lower tax bracket in which case the math
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is a little bit more involved so if
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you're in the percent tax bracket you're
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eligible for a thousand dollar deduction
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that deduction will generally be worth
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one hundred dollars in actual cash back
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in your pocket the tax credit on the
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other hand is a tax benefit that gives
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you a dollar for dollar reduction in
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your tax liability equal to the credit
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credit amount this is a little bit
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easier to understand there's less math
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involved let's say again that you have a
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nine thousand dollar tax liability for
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the year without a particular credit a
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thousand dollar credit then will
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directly decrease your tax liability to
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eight thousand dollars so if i could
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magically give you the choice between a
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thousand dollar deduction and a thousand
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dollar credit generally speaking
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probably one go with the credit all
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right with that explanation out of the
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way let's get into the actual strategies
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number one start tracking your
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unemployment benefits if you receive
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unemployment benefits in 2020 you're
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probably overjoyed to hear the american
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rescue plan act excluded the first ten
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thousand two hundred dollars of
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unemployment benefits from federal
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income tax for tax year 2020 while this
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benefit has not been extended to 2021
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one thing you really want to keep track
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of is how much money you collected from
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unemployment in 2021 now i know what
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you're thinking
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why do i have to keep track of this well
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in my state send me a form 1099g for
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2021 telling me how much they paid me in
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unemployment during the year the answer
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to that question is of course yes your
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state will send you a form 1099 g
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indicating how much it thinks it paid
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you in 2021 unemployment benefits but
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here's the thing
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due to the beefed up benefits
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implemented in the wake of the coven 19
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pandemic beefed up unemployment benefits
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right the extra 300 400 payments right
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per week um due to all these benefits
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fraudulent unemployment claims went
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through the roof in 2020 and continued
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into 2021 that means that it's possible
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that some fraudster use your social
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security number to file a fraudulent
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unemployment claim in your name this is
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why it's important for you to keep your
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own records of how much unemployment you
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collected in 2021 and then compare that
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amount to the 20 2021 form 1099-g that
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your state is going to send you if the
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amounts are different alert your state
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unemployment office immediately and
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request a corrected 1099g so start
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adding up your unemployment figures now
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keep track of these amounts so you have
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them ready next tax season and this
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piece of advice goes really for all tax
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forms right people make mistakes
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companies make mistakes accounting firms
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make mistakes fraud happens right don't
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just accept tax forms blindly double
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check them strategy number two is to see
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if you qualify for the recovery rebate
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credit and make moves to maximize it so
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if you didn't get the third stimulus
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payment or you you received a less than
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the full amount of fourteen hundred
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dollars for each of you your spouse and
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independents you claim you may be
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eligible to take the recovery rebate
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credit on your 2021 tax return for the
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difference keep in mind however that the
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2021 recovery rebate credit is based on
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your 2021 income phasing out at the same
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income levels as a third stimulus check
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you can see those amounts in the table
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on the screen here
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so let's say that you're single with no
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dependence and you made eighty thousand
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dollars at your job in 2019 and 2020.
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based on your income you were not
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eligible to receive a third stimulus
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check but even if you make the same
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eighty thousand dollars from your job in
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2021 you may still be able to get that
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recovered rebate credit how well if you
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can somehow manage to get your 2021
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adjusted gross income to 75 000 or below
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you'd be eligible for the full 1400
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recovery rebate credit on your 2021 tax
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return maybe this means putting aside
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money now so you can contribute at least
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five thousand dollars to a traditional
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ira for 2021 assuming you aren't covered
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by retirement plan at work uh which in
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this example would decrease your 2021
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adjusted gross income to 75 000
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this is an example of how a tax
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deduction can actually be worth more
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than usual because in addition to the
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tax benefit for the deduction in and of
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itself the deduction also makes you
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eligible for a credit that you wouldn't
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be otherwise eligible for double tax win
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there are other ways to decrease your
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2021 agi to increase your eligibility
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for the 2021 recovery rebate credit for
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example if you typically receive a
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holiday bonus perhaps you can ask your
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boss if you can receive it in january
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right rather than in december just a
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thought right worth a try my next
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strategy on how to prepare yourself for
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the upcoming tax season is to see if you
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qualify for tax benefits that are
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related to education if you paid for
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your own or dependence education 2021
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you may be eligible for some tax
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benefits for doing so like the american
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opportunity tax credit which is a dollar
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for dollar credit available to those who
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pay qualified education expenses to
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calculate the credit
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you add the first two thousand dollars
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of qualified education expenses you paid
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for each eligible student during the
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year plus 25 percent of the next two
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thousand dollars of qualified education
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expenses paid for that student
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mathematically then the credit reaches
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its 2500 maximum once four thousand
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dollars of qualified educational
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expenses have been paid for that student
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forty percent of the american
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opportunity credit is partially
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refundable mean that even if the credit
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completely wipes out a taxpayer's tax
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liability for the year they may still
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receive 40 of the credit back as a
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refund the american opportunity credit
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maxes out at 2 500
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can't be claimed for the same student
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for more than four tax years and just
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phase out the income level shown in the
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table on screen feel free to pause the
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video to take that all in
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if you have a 529 plan set up for
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yourself or your dependent and you also
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meet the eligibility requirements for
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the american opportunity tax credit
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you'll want to put some thought into how
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you pay for educational expenses in
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2021. since you can't take the american
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opportunity tax credit on many on money
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you would draw tax free from a 529 plan
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it might make sense for you to pay for
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at least two thousand dollars and
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possibly four thousand dollars of
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educational expenses from non 529 plan
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funds so you can take the american
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opportunity credit on those expenses
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also see if you qualify for the lifetime
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learning credit unlike the american
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opportunity credit the lifetime learning
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credit can be claimed for the same
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student for any number of years hence
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why it's called the lifetime learning
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credit to calculate the credit you
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simply multiply the amount of qualified
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education expenses you paid for all
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students during the year up to ten
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thousand dollars by 20
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thus the maximum lifetime learning
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credit a taxpayer can take during the
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year is two thousand dollars unlike the
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american opportunity credit none of the
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lifetime learning credit is refundable
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if you still have credit remaining after
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your tax liability for the year is wiped
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out that excess credit is lost the
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lifetime learning credit is phased out
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the income level shown in the table on
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screen so for example if you're single
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and your agi is 69 000 or more you can't
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take this credit same thing for married
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individuals filing jointly with an agi
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of 138 000 or more there are some
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potential planning opportunities with a
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lifetime learning credit as well for
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example if you aren't in a rush to
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complete whatever degree you're working
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toward you could potentially limit your
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current your educational expenses to ten
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thousand dollars in order to take the
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twenty percent lifetime learning credit
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on all of them and then pay you know for
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ten thousand dollars expenses next year
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to maximize the credit next year as well
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additionally if you owe student loans
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taken out for your own your spouse's
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your dependence education you may be
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eligible for a student loan interest
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deduction to qualify uh the individual
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whose education to load financed must be
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enrolled at least half time in a program
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leading to a degree or other recognized
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credential the definition of half time
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varies from college to college and from
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university university so if the student
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isn't currently taking a full class load
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might be worth it for them to confirm
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with their educational institution that
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they are in fact enrolled at least half
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time by the institution's definition if
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they are not enrolled at least half time
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they might want to consider increasing
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their core course load to reach halftime
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status so they or whoever claims them as
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a dependent can benefit from the student
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loan interest deduction student loan
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interest reduction maxes out at 2 500 a
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year and is phased out the income level
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shown in this table so if you're single
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make at least 85 000
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uh you're not eligible for the deduction
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same thing if you're married filing
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jointly with an agi of at least one
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hundred and seventy thousand dollars
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married filing separately folks sorry
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you can't take this deduction also along
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the topic of education if you're an
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educator you are allowed a deduction of
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up to two hundred fifty dollars per year
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five hundred dollars if you're married
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filing jointly and both spouses are
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educators
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this is for unreimbursed expenses you
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incurred in doing your job so let's say
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you're a single educator and by the end
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of 2022 you have to take some classes
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to maintain your credential or something
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like this although the cost of those
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classes 500
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your employer will will not reimburse
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you for these expenses but they do
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reimburse you for all other costs you
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incur in doing your job rather than
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waiting until the last minute and paying
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all 500 worth of classes next year
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perhaps you want to take 250 worth of
[616]
classes this year and the remaining 250
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for the classes next year in order to
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maximize your educator expense deduction
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if you pay all 500 of expenses in 2022
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you will only be able to deduct 250 of
[627]
them in 2022 you won't be able to take
[629]
any deduction in 2021 because you did
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not have any unreimbursed educator
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expenses in 2021 however if you pay for
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250 worth in 2021 and 250 in 2022 you
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will be able to take a 250 deduction
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each year for a total deduction of 500
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across both years
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next strategy if you're a parent make
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sure you optimize your child tax credit
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on your 2021 tax return especially
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taking into account the advanced
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payments of this credit and the ability
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to opt out of them so just for context
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the american rescue plan significantly
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increased and expanded the child tax
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credit for the 2021 tax year well
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previously the child tax credit was only
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for two thousand dollars for children up
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to the age of 16 with only fourteen
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hundred dollars of the credit being
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refundable the american rescue plan made
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the 2021 total tax credit thirty six
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hundred dollars for children up to the
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age of five three thousand dollars for
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children between the ages of six and 17.
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while the income limitations for the
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original two thousand dollar portion of
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the child tax credit have not changed
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beginning at 400k for married taxpayers
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finally jointly 200k for other filers
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the income limitations for the new 3 600
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3 000 portion of the child tax credit
[690]
are much lower than this and are shown
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on this table so it's possible if you
[693]
have a high income that you might
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qualify only for the old two thousand
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dollar portion but not the new three
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thousand dollar or thirty six hundred uh
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3600 portion of the credit another
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change made to the child tax credit for
[705]
tax year 2021 is that a portion of the
[707]
credit is now payable in advance earlier
[709]
this year the irs determined which
[711]
parents were eligible for the 2021 child
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tax credit at least based on the records
[715]
they had and began making payments of
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them in july payments will continue
[719]
until december the amount of each
[720]
monthly payment is supposed to be 1 12
[723]
of the total 2021 child tax credit
[725]
amount the irs has deemed a parent or
[727]
parents to be eligible for based on
[729]
their last filed tax return there are
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two major planning opportunities with
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respect to the child tax credit the
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first planning opportunity has to do
[736]
with determining whether or not you
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would like to continue receiving monthly
[739]
payments from the irs if you do not
[741]
there is an option on the irs website to
[742]
opt out of receiving future monthly
[744]
payments and instead claim your
[746]
remaining child tax credit amount on
[748]
your 2021 tax return you may want to opt
[750]
out of receiving monthly payments of the
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credit for example if you typically
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depend on your tax refund as a for
[756]
savings account although this isn't
[758]
ideal and as a tax professional i prefer
[760]
that you have the money in your own bank
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right or
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you know in your pocket so you can
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invest it throughout the year i can
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understand why some taxpayers may want
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to get a large refund when they file
[768]
their 2021 tax return rather than
[770]
obtaining incremental deposits over the
[772]
span of a few months you may also want
[774]
to opt out of receiving advanced
[775]
payments of the 2021 child tax credit if
[777]
you are receiving them but you know that
[779]
your income will be over one or both
[780]
child tax credit phase out amounts if
[782]
this is the case you may receive more
[784]
advanced payments the actual amount of
[786]
the 2021 child tax credit you are
[788]
eligible for in this case you may be
[790]
required to pay back the difference
[791]
between the monthly payment amounts you
[792]
received and the actual amount of the
[794]
2021 child tax credit you are eligible
[797]
for however if your 2021 adjusted gross
[799]
income is below the figure in the second
[802]
column in the table on screen for your
[803]
filing status you may qualify for full
[805]
repayment protection meaning that you
[807]
will not have to pay back any excess
[809]
amount of the 2021 child tax credit you
[811]
receive as a monthly payments and if
[813]
your 2929 adjusted gross income is below
[815]
the figure in the third column in the
[817]
table you see on screen for your filing
[819]
status you may qualify for partial
[821]
repayment protection even if you don't
[823]
necessarily opt out of the monthly
[824]
payments in this situation it's still
[826]
important for you to know that you may
[827]
be required to pay a portion of the
[828]
credit you received in advance back when
[830]
you file your tax return for the year so
[832]
you aren't hit with a surprise tax bill
[834]
when you file also it's important for
[835]
parents to keep in mind that congress
[837]
has not yet extended this expanded child
[839]
tax credit into tax years 2022 and
[841]
beyond though some democrats in congress
[843]
as well as the president himself are
[845]
pushing for this finally my last
[847]
strategy is for those of you who work
[848]
from home as a freelancer or a side
[850]
hustler or something like that if you've
[851]
been working remotely for yourself you
[853]
may be eligible for work from home tax
[855]
benefits so make sure you understand
[857]
these while w2 employees and 1099
[859]
freelancers alike used to be able to
[861]
potentially take some tax benefits for
[863]
working from home the tax cuts and jobs
[865]
act packed in 20 past in 2017 uh
[869]
eliminated these benefits for most w-2
[871]
employees freelancers and other small
[873]
business owners however still have the
[875]
ability to take several tax deductions
[877]
for working from home for example
[878]
there's a home office deduction if you
[880]
regularly work from home in an area
[881]
exclusively used for your freelancing
[883]
business you are likely eligible to take
[885]
the home office deduction for that area
[887]
calculating the home office deduction is
[888]
simple you simply multiply your housing
[890]
costs such as rent payments for mortgage
[892]
interest
[893]
homeowners or renters insurance
[895]
your property taxes utilities etc by the
[898]
proportion of your living space used as
[900]
your home office so example let's say
[902]
you rent a two bedroom one thousand
[904]
square foot apartment for two thousand
[905]
dollars a month which comes out to
[907]
twenty four thousand dollars per year
[908]
you also pay two hundred dollars a year
[910]
for renters insurance you incur no other
[912]
costs for housing so your annual housing
[914]
expense is twenty four thousand two
[916]
hundred dollars let's say you sleep in
[917]
the larger 200 square foot bedroom and
[919]
use a smaller 150 square foot bedroom as
[921]
your home office you work in the spare
[923]
bedroom every day and working is the
[925]
only thing you do in this bedroom this
[926]
last part is key in order for a space to
[928]
qualify as a home office you must use it
[930]
regularly and exclusively for your
[932]
business so working on your laptop in
[934]
the bed you sleep in would not qualify
[936]
your bedroom for the home office
[937]
deduction in this example use fifteen
[940]
percent of your apartment as a home
[941]
office that's 150 home office square
[943]
feet divided by a thousand total
[944]
apartment square feet multiplying
[946]
fifteen percent by your annual housing
[948]
expenses twenty four thousand two
[949]
hundred dollars gives you a three
[950]
thousand six hundred thirty dollar home
[951]
office deduction
[953]
irs also lets you use a simplified home
[954]
office deduction method that involves
[956]
simply multiplying the square footage of
[957]
your home office by 5 000 per square
[959]
foot up to 300 square feet in this case
[962]
using the simplified method would only
[963]
yield a home office deduction of 750
[966]
so you would be better off using the
[968]
standard method knowing this information
[970]
about the home office deduction provides
[971]
some planning opportunities if you don't
[973]
currently have a space to use regularly
[975]
and exclusively in your small business
[977]
consider setting one up even if you
[978]
can't spare an entire room perhaps you
[980]
could partition off a portion of a room
[982]
and use that space regularly and
[983]
exclusively in your business so it
[985]
qualifies for the home office deduction
[987]
and even if you do currently have a
[989]
qualifying home office space perhaps you
[991]
can consider using a larger space for
[993]
your home office in order to maximize
[995]
your deduction
[996]
the example i used previously you may
[998]
want to use a larger bedroom as your
[999]
home office in order to increase your
[1001]
home office deduction and then sleep in
[1003]
the smaller bedroom
[1005]
also kind of last thought here if you
[1007]
have your own business or your freelance
[1008]
is also not a bad idea if you start
[1010]
tracking your automobile expenses if you
[1012]
have a home office and you have to drive
[1013]
to meet clients around town keep track
[1015]
your mileage because it could save you
[1017]
quite a bit of tax time
[1018]
similar to the home office deduction
[1020]
there are two ways to calculate your
[1021]
automobile expenses the first and more
[1023]
simple way is to simply multiply the
[1025]
number of miles you drive during the
[1027]
year by the standard mileage rate for
[1028]
the year in 2021 this rate is 56 cents
[1031]
per mile alternatively you could divide
[1033]
the number of miles you drove your car
[1034]
for your business during the year by the
[1036]
total number of miles you drove your car
[1037]
totaled during the year the resulting
[1039]
percentage is your business use
[1040]
percentage for your car you could then
[1042]
add up all the actual vehicle expenses
[1044]
you incurred during the year such as you
[1046]
know gas and repairs and maintenance and
[1048]
insurance and multiply the sum of these
[1050]
expenses by your business percentage for
[1052]
the vehicle and assuming you own rather
[1055]
than lease the vehicle you can also take
[1056]
a depreciation deduction on it if you
[1058]
use this actual expense method all right
[1060]
folks those are some tax strategies you
[1062]
can implement or at least look into now
[1064]
before the end of the year to minimize
[1066]
your 2021 tax liability and put more
[1068]
money in your pocket and less than uncle
[1070]
sam's if you'd like to check out more of
[1072]
my tax related videos check out my video
[1074]
in llc's right over here right do llc's
[1076]
really save you on taxes as well as my
[1078]
video where i review the turbo tax tax
[1080]
software right down here see in those
[1082]
videos everybody bye
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