2021 Taxes and Home Equity: What Homeowners Should Know

Understand all of your options before you begin filing taxes. There are potential ways to save some money if you’re a homeowner.

The ongoing COVID-19 pandemic spawned several factors impacting rising inflation, from stimulus programs to the changes in the labor market, which may lead to a higher bill than usual this tax season. Though federal income tax brackets have increased for 2022, existing surcharges for high earners, unchanged standard deductions, and more can ratchet up the amount you owe, so it’s especially important to understand all of your options before you begin filing since there are potential ways to save some money.

First, here are some important dates to keep in mind:

• April 18: Deadline to file taxes
• April 19: Deadline to file taxes for Maine and Massachusetts residents (due to Patriot’s Day)
• May 16: Deadline to file taxes for victims of the 2021 Colorado wildfires and Illinois, Kentucky, and Tennessee tornadoes

The IRS is also warning that refunds could take longer than the usual three weeks to process this year, so it pays to be patient.

Before you panic about what you owe for this year or years prior, look at potential tax credits and ways to get your finances back on track.

Changes to the Child Tax Credit

The child tax credit was increased to $3,600 for the 2021 tax year. Most taxpayers have already received half of this amount from July through December, but parents now have to file a tax return to claim the remainder.

If this applies to you, wait to receive IRS letter 6419, which can help you ensure that you file an accurate return and avoid delays. Even if your income doesn’t meet the minimum amount required to file a tax return, you’ll need this to claim any extra money that might be owed for the child tax credit. The IRS will send two of these letters to married couples who file a joint return. You’ll want to keep both and total the amounts for your taxes.

If You Were Self-Employed…

If you’re self-employed and your income is documented with 1099 statements instead of a W-2, you can write off the percentage of your home that you dedicate exclusively to work (this is typically determined by square footage).

If You Worked from Home But Weren’t Self-Employed…

Unfortunately, if you work from home but still received a W-2 form from your employer, you can’t claim home office expenses.

If You Were Unemployed…

It’s important to note that while 2021 stimulus checks will not count as taxable income, unemployment benefits will — and if you didn’t have any money withheld when you signed up for those benefits, it could be a significant amount.

Owe More Than You Can Pay? 4 Things to Consider:

1. File What You’re Able to — Even If It’s Not in Full

Filing your taxes, even if you can’t pay what you owe in full, may still cut down on your bill down the road. If you don’t file, you can get hit with a “failure to file” penalty fee from the IRS, which is 5% of your remaining balance every month (up to a maximum of 25% of your unpaid tax total). And don’t forget that interest will accrue on what you haven’t paid.

2. Ask for More Time

Fortunately, if you aren’t prepared to pull together the documents you need to file for the deadline or could simply use a little more time to determine a plan, you can request a six-month extension. Though you’ll still be responsible for estimating your taxes and paying that, this approach helps you avoid dealing with penalties for filing or paying too late.

3. Check Out Other IRS Solutions

There are a few different ways to work with the IRS to handle your taxes if you owe more than you can currently pay. These include temporarily delaying collection until your financial situation improves and payment plan programs (both short- and long-term) — though it’s important to note that you’ll still have to deal with interest and penalty payments. In other cases, you might be able to file an Offer in Compromise, where you can settle any debt to the IRS for less than what you owe. But, this option typically isn’t available to homeowners given that you likely have equity and, therefore, a way to pay taxes.

4. Consider Your Home Equity

If you don’t pay your taxes, a lien can be put on your home. Fortunately, you can access your home equity to settle your debt before this happens.

With a home equity loan, you won’t be taking on bad debt, and unlike credit cards that average more than 16% interest, a home equity loan only averages 5.82%. The lump-sum you owe is shared with you upfront when you file, which can be an advantage over a HELOC. You’ll want to make sure you can afford the payments on a home equity loan or a HELOC, as your home may be foreclosed upon if you can’t make them — and this is especially important to consider with both of these options as interest rates continue to rise. The 2017 Tax Cuts and Jobs Act means that the interest you pay on a home equity loan or HELOC isn’t tax-deductible if you use it to pay off taxes — it only qualifies if you use the loans to make home improvements.

Another financing solution to consider is a home equity investment (also called a shared equity agreement). Unlike a loan, it gives you cash in as little as a few weeks in exchange for a share of the future value of your home.

Since it’s an investment, not a loan, there are no monthly payments or interest. Instead, you settle the investment through a buyout with savings, refinance, or sale of your home before or at the end of the 10-year effective period.

When it comes to home financing, one size doesn’t fit all, and doing your research can help you find the option that works best for your personal situation — whether that’s an IRS payment plan or accessing your home’s equity.

Editor’s note: Author is not a tax professional. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Related:

• How to Plan for Taxes Throughout the Year
• 8 Steps to Take If You Can’t Pay Your Taxes
• 4 Ways to Use Your Tax Return to Improve Your Financial Health

Reviewed March 2022

About the Author

Rachel Keohan brings more than ten years of marketing experience, and eight years specifically within FinTech, to her role as Head of Marketing for Hometap. Rachel holds an MBA from Babson College, specializing in Marketing and Entrepreneurship, and a Bachelor of Science in Business Administration from the University of Connecticut.