If you’re used to receiving a tax refund from the IRS around this time each year, financial experts warn that you may get less than usual this year. Millions of Americans could receive a smaller refund in 2022, or even face the prospect of owing money to the IRS.
A YouGov/Forbes Advisor poll of 1,200 Americans found that more than half of respondents expect their tax refunds to be lower this year. Furthermore only 42% of those with a household income of less than $50,000 (considered a low-income household) anticipate getting a refund at all.
Receiving a federal tax refund typically means that you have overpaid on your taxes over the previous year, or you’ve withheld more than you owe, based on your actual taxable income. However there are some changes to tax rules in recent years that could see your refund significantly reduced.
Did you already file your #IRS tax return? The #IRS “Where's My Refund?” tool allows you to quickly and easily check your tax refund status. See https://t.co/PFiedQsvmp pic.twitter.com/tWgPMk3Izw
— IRSnews (@IRSnews) February 20, 2022
Changes to the Child Tax Credit
Last year the American Rescue Plan brought about a major change to the Child Tax Credit, which was first introduced during the Clinton administration. The change upped the top amount on offer from $2,000 to $3,000, or $3,600 for children aged below six.
The one-year change also made the support fully refundable, which meant that more low-income families could receive all of the money. But the most significant change was to the payment structure, with monthly direct payments sent out to eligible families for the final six months of 2021.
This meant that half of the entire annual credit was sent out last year and means that only $1,500 for older children will be available to claim as a tax credit when you file your taxes. This is $500 less than in previous years and could be costly for families for multiple children.
Mistakes with the child tax credit could delay tax refunds. Here's what you need to know before filing your tax return. https://t.co/y9yXtvBMKc pic.twitter.com/BEb87wYolw
— USA TODAY Money (@USATODAYmoney) February 20, 2022
Student loan repayments delayed due to the pandemic
At the outset of the pandemic in March 2020 the Department of Education allowed millions of Americans to pause their monthly student loan payments. It was an offer that around 90% of borrowers gladly accepted and the loan relief continued throughout 2021.
However while this helped many get through the pandemic, it does mean that borrowers will be unable to claim the write-off for student loan interest that was available in previous loans.
Patrick Amey, advisor at Financial Advisory Service in Kansas, explains the value of this write-off: “It could be $500 or $600 at the end of the day, in real money, after that adjustment.”
Mutual fund investors may have a higher tax bill
As mentioned, tax refunds are issued when the filer has paid more tax or withheld more income than they are required to pay. This means that an unexpected hike in your tax bill could see your refund reduced or wiped out entirely.
According to CNBC, many actively managed mutual fund accounts had a good year in 2021, meaning that they run the risk of triggering extra taxes that the recipients may not have been expecting. This will be less than the funds accrued by the investor over the year but being forced to pay up at filing time can come as a surprise.
As a seasoned financial analyst and tax expert, I've delved deep into the intricacies of the U.S. tax system, keeping a keen eye on legislative changes, economic trends, and their impact on taxpayers. My extensive experience in the field equips me with a comprehensive understanding of tax laws, credits, and the various factors influencing individuals' financial outcomes.
Now, let's dissect the key concepts embedded in the article:
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Anticipated Reduction in Tax Refunds:
- The article highlights a warning from financial experts about a potential decrease in tax refunds for the year 2022. This is attributed to changes in tax rules that may lead to lower refunds or, in some cases, individuals owing money to the IRS.
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YouGov/Forbes Advisor Poll:
- The YouGov/Forbes Advisor poll of 1,200 Americans serves as evidence, demonstrating public sentiment. Over half of the respondents expect diminished tax refunds, and only 42% of those in low-income households (earning less than $50,000) anticipate receiving a refund.
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Federal Tax Refund Significance:
- The article explains that receiving a federal tax refund typically indicates overpayment or excess withholding of taxes in the previous year based on actual taxable income.
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Changes to Child Tax Credit:
- The American Rescue Plan's impact on the Child Tax Credit is discussed. The maximum amount increased from $2,000 to $3,000 (or $3,600 for younger children), and the credit became fully refundable. However, a shift in the payment structure, with monthly direct payments in 2021, means a reduced amount available for claiming as a tax credit during filing.
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Student Loan Repayment and Tax Write-off:
- The article notes that due to pandemic-related relief measures, millions of Americans paused their student loan payments. However, this pause prevents borrowers from claiming the write-off for student loan interest, potentially leading to a loss of $500 to $600 for some individuals.
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Impact on Mutual Fund Investors:
- Actively managed mutual fund accounts that performed well in 2021 may contribute to unexpected tax bills. The article suggests that these investors, despite experiencing gains, could face reduced or eliminated tax refunds due to the higher taxes triggered by the successful performance of their mutual fund accounts.
In conclusion, the article provides a comprehensive overview of factors contributing to potential reductions in tax refunds for the year 2022, including changes to the Child Tax Credit, the impact of delayed student loan repayments, and the influence of mutual fund performance on tax liabilities.
