Ahead of tax season this year, the Internal Revenue Service has issued several warnings to Americans that their tax refund could be significantly lower when compared to last year. Some analysts have predicted this could put a strain on many families, particularly those who have anticipated an expanded child tax credit.
Financial expert Lynnette Khalfani-Cox explained to NPR why 2022’s tax returns will be smaller, citing “four main reasons”. “People should absolutely expect smaller tax refunds this year. And frankly, some people might even owe the government money,” Khalfani-Cox said.
Joe Buhrmann, a certified financial planner and senior financial planning consultant at eMoney Advisor, said smaller refunds and high inflation may be a “double whammy” for many Americans trying to make ends meet.
“There’s really four main reasons why,” she said. “The first is: no more stimulus checks. The second is that what was called the enhanced child credit — that’s gone.”
A special pandemic-era tax break for charitable deductions was also nixed, Khalfani-Cox explained. Furthermore, despite the volatile year on the stock market, some people might face taxes on investment gains, particularly if they own mutual funds that had to sell off stocks.
Moreover, the government’s response to the pandemic was to issue $1,400 stimulus checks to qualifying individuals and families. “But a whole bunch of taxpayers actually received what’s called a recovery rebate credit,” Khalfani-Cox said. “And they got $1,400 per person on their 2021 taxes,” increasing their tax refund or lowering their bill. “But now that’s gone” for people dealing with 2022 taxes, Khalfani-Cox said.
NPR reported:
For this tax season, many families with two children under 6 years old won’t be able to count on an extra $3,200 worth of tax credits that helped them last year. That’s because while pandemic legislation provided $7,200 in combined tax credits for two kids under 6 in the last tax season, that same family is now looking at $4,000 in credits.
The child tax credit and related pandemic policies had a large impact — the U.S. Census Bureau said the measures sent child poverty rates down “46% in 2021, from 9.7% in 2020 to 5.2% in 2021,” to the lowest child poverty rate on record, based on the Supplemental Poverty Measure, which was introduced just over a decade ago.
“In 2021, parents were getting what folks call the enhanced child tax credit,” Khalfani-Cox said. “It was either $3,000 for children under 18 or $3,600 for kids under 6 years old.”
“In 2022, now that child tax credit is going back down,” Khalfani-Cox stated. “It’s reverting back to the $2,000 level.”
Furthermore, a charitable deduction tax break has also ended. “It was a $300 deduction for people who don’t itemize and a $600 deduction for married couples,” Khalfani-Cox explained. “But Congress didn’t extend this deduction in 2022.”
In addition, some may face taxes on investment gains. “On the investment gains front, 2022 was a wild year, obviously, on Wall Street and the Dow was down, the Nasdaq was down,” Khalfani-Cox claimed. “So people might be thinking, ‘Why am I having a bigger tax bill to pay because of investment gains? I didn’t have any investment gains.’ ” The volatility in the markets forced many mutual funds to sell holdings, where some may have been profitable.
Ultimately, there are many factors as to why you should expect a lower tax refund compared to last year.
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