What You Should Know About Taxes This Year
People often have one of two approaches to understanding taxes: either avoid the topic or pay someone else to understand it. That’s why we’re kicking off the year with a simple yet helpful guide to a subject that affects just about everyone. When you explore the subject early on you have more time to follow up on questions regarding your particular circumstances.
As usual, there’s a lot to know this year. Tax law is complicated, so you may need to consult a professional to find out which rules applies to you. There are also many preconceptions about who pays taxes and who doesn’t. We’ll tackle some of those, too, starting with a topic that impacts millions of citizens in this country.
Do Lower-Income Households Have to Pay Federal Income Taxes?
If you’ve been unemployed for a while or made under a certain amount of money in the last year, the silver lining is that you may owe little or no money in taxes. Most low-income households don’t owe any federal income taxes at all. You’re probably in this category if your yearly income is lower than the standard deduction.
What About the Money I Received in Unemployment?
Although unemployment has gone down, a lot of people have received unemployment benefits during the pandemic. You generally don’t have to pay taxes on those unless you received over a certain amount in compensation.
What’s the Difference Between Federal Versus Illinois’ State Income Taxes?
If you’ve made above a certain amount of money in the past, you likely sent out two envelopes – one to the IRS and one to pay your state income taxes. There are many different federal income tax brackets. Find yours here. That money helps pay our country’s bills for things like Social Security, health programs and defense, not to mention infrastructure, education, public transportation and disaster relief.
But each state is different, and not every state has a state income tax. Sorry – Illinois isn’t one of them. Just like last year, a person’s net income in Illinois will be taxed at a flat rate of 4.95 percent.
What Exemptions and Deductions Help Low-Income Illinoisans?
You may have heard that Illinois’ flat tax rate puts lower-wage earners at a disadvantage, but there’s a catch. There are exceptions built into the law that give workers who don’t make much a leg up. Here are three important ways you might be able to lower your state income taxes:
- Earned Income Tax Credit (EITC). This is a benefit for workers with a low or moderate income. If you qualify it could either reduce the amount of tax you owe or result in a refund. (The criteria may be different if you have a child or file a joint return with your spouse.)
- Property Tax Credit. In a nutshell, this is a credit on your individual income tax return of up to 5 percent of the real estate tax you paid on your home.
- Other possible exemptions. You may be entitled to a personal exemption of $2,275, subject to certain income limits. There also may be an additional $1,000 exemption for you if you are 65 or older or legally blind. Military pay and contributions made to certain college savings plans are other examples of areas where tax filers can be entitled to exemptions.
What About President Biden’s Child Tax Credit for Parents?
Are you claiming any kids who are 17 years old or younger on your taxes? If so, you might qualify for a payout of up to $1,800 per child. Many taxpayers began receiving checks from the government starting last summer. Some filers opted to get the cash in one lump sum. When filing your 2021 income tax return this April, there’s a chance you’ll get the remaining amount from the government if you’re in one of these two categories:
- Individual earners making up to $112,500 a year
- Joint filers making up to $150,000 a year
Not bad, huh? There are no work requirements and you don’t even need a permanent home to claim them. Again, the devil is in the details – there are always details when it comes to taxes! – so check with a professional or do a bit of extra research to be sure you qualify.
At Currency Exchange, we’re happy to help take some of the work off your plate as you head into a brand new year with a whole host of financial services. Find your nearest location to get started today!
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