Reasons why certain taxpayers may receive a lesser tax refund this year

Monday marks the beginning of tax season, with the IRS beginning to accept and process 2022 tax returns. While millions of Americans excitedly await their tax refund, some may receive a lesser check than normal, according to experts.

The expanded Child Tax Credit is the most significant factor that could affect tax refunds, according to tax experts. The IRS has not officially announced when it will begin receiving tax returns, but it generally begins accepting new submissions at the end of January.

People obtain tax refunds if they have paid the IRS more than they owe over the year. The difference is then paid by check by the tax department.

Some taxpayers may also be eligible for tax credits, which reduce the amount owed to the IRS dollar-for-dollar. Typically, these credits target certain groups of taxpayers, such as parents, students, and workers with modest incomes.

What do Americans need to know before filing their tax returns as tax season begins? 04:06

Under President Joe Biden’s American Rescue Plan, the Child Tax Credit (CTC) was increased from $2,000 per child to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6 and 17. However, despite the larger tax credit, the scheme could reduce the tax refunds of some parents when they file their returns.

This is due to the fact that half of the enlarged CTC was paid out in advance via monthly checks from July 2021 to December 2021, and parents will claim the remaining half of the tax credit on their tax returns by the April 18, 2022, filing deadline. (IRS offices will be closed this year on April 15, the regular tax deadline, for Emancipation Day, delaying the filing due to April 18).

In other words, instead of receiving a $2,000 tax credit for their children as in recent years, parents will claim either $1,500 or $1,800 per child, depending on the child’s age.

Consider a family with two children aged eight and ten: When filing taxes, the parents will claim a $3,000 tax credit for the two children (representing one-half of the total $6,000 in tax credits available for two children under the extended CTC). However, this is a $1,000 decrease in tax credits compared to the previous tax year, when they claimed $4,000 for their two children. According to tax experts, the effect could be a lesser tax refund in 2022.

Toby Mathis, founding partner of Anderson Law Group and taxation specialist, remarked, “A lot of people will get their refunds and they won’t get as much as anticipated,” People who are anticipating the entire amount, ignorant that the money they received [in 2021] was a prepayment of the tax credit, would be negatively affected.

Mark Steber, chief tax information officer at Jackson Hewitt, said that some parents were aware of this situation and opted out of the monthly prepayments in order to receive a larger tax refund.

Steber explained, “Some people want the full benefit of the tax credit when they file, or they weren’t sure if they qualified,” Numerous individuals utilized the IRS’ webpage to opt out of the advanced payments.

Nonetheless, there are some parents and taxpayers who may receive larger tax refunds.

Due to changes to the tax code in 2021, the following scenarios illustrate how individuals’ tax refunds could be larger or smaller this year. There is one significant exception, however: tax refunds rely on a variety of factors, including income tax brackets, tax credits, and deductions such as retirement contributions.

For the reasons stated above, some parents filing tax returns this year may receive a lesser CTC tax credit, hence receiving a smaller tax refund than usual.

However, there are additional difficulties with the CTC that might reduce a taxpayer’s refund, according to tax specialists. Among them are those who received higher CTC payments for a child despite not being eligible.

“A lot of people could be in for a rude awakening this year,” said Christian Cyr, CPA, president and chief investment officer of Cyr Financial and a certified public accountant.

One of his clients had a child who turned 18 last year, but because the IRS determined CTC eligibility based on 2020 tax returns, it looked that the child was just 17. “The IRS isn’t smart enough to realize or didn’t look into the date of birth, so they started dishing out $1,500 to my client through the advanced tax payments,” Cyr said. He questioned, “He said, ‘What does that mean?’”

Cyr responded that the parent will be required to reimburse the advanced CTC funds. In such a situation, the IRS would lower a taxpayer’s refund to recover the overpayment.

Similarly, some divorced or co-parenting parents may be responsible for repayment if it wasn’t their year to declare the child as a dependent. The parent who claims the child as a dependent in 2021 will receive the CTC; if the other parent received the checks in error, they will be required to reimburse the money.

Parents whose child was born in 2021 receive a larger reimbursement.

According to tax specialists, families that welcomed a kid in 2021 may be eligible for a larger refund in early 2022.

Due to the fact that the IRS determined eligibility for the advanced CTC payments and the third stimulus check (worth $1,400 per eligible adult and child) based on 2019 or 2020 tax returns. Therefore, the IRS would not have been aware of children born in 2021 and would not have directed advance CTC payments for those children.

On their 2021 tax returns, families with newborns or children born, adopted, or fostered in 2021 will be entitled to claim the full expanded CTC credit of $3,600 per child. In addition, they should be eligible for a $1,400 stimulus check for the child, according to Jackson Hewitt’s Steber. These measures might collectively increase a family’s tax refund by $5,000 per child.

The Child and Dependent Care Credit was enlarged by the American Recovery and Reinvestment Act, a reform to the tax code that is less well-known than the Child Tax Credit.

Previously, parents who paid for child care while they worked or sought employment were eligible for a tax credit of up to $3,000 per dependent. However, the American Recovery and Reinvestment Act has increased this credit to $8,000 per child, with a maximum of $16,000 for two dependents.

There are certain restrictions. The child must be under 13 or unable to care for themselves mentally or physically, reside with the taxpayer for more than half the year, and be a dependent. Additionally, a parent, or both parents if filing jointly, must have earned income in 2021 in order to receive the tax credit.

The IRS does not consider all child care payments to be eligible for the tax credit. Overnight camps and private schools are specifically excluded. However, paying a relative to care for a child while you or your spouse are at work is deductible if the relative is not themselves a dependent (like an older sibling).

The tax credit will provide eligible families with a dollar-for-dollar reduction in their tax liability. It is also refundable, meaning that if the tax credit exceeds your federal income tax liability, you will receive the excess in your tax refund.