Next year could be a tax refund shock for Americans

Next year could be a tax refund shock for Americans

Millions of U.S. taxpayers could be in for a rude awakening when they submit their 2022 tax returns due to the expiration of numerous pandemic benefits created by lawmakers to assist Americans weather the catastrophe.

According to Jackson Hewitt’s chief tax information officer, Mark Steber, families may receive reduced tax refunds when they file their returns for the current tax year in early 2023. According to IRS data, the average tax refund in 2022 (for the 2021 tax year) was about $3,200, a 14% increase from the previous year.

Steber emphasized that the perks that boosted refunds this year, such as federal stimulus money and the enhanced Child Tax Credit (CTC), have essentially expired.

As an example, the CTC, which is credited for bringing millions of children out of poverty, has reverted to its pre-pandemic levels under the current tax code. The CTC will return to its previous level of $2,000 per child, as opposed to the pandemic credit of $3,600 per child.

Steber said that the year 2021 was extremely notable due to the introduction of so many new tax cuts. The term’refund shock’ or’refund surprise’ derives from the fact that a number of tax-rate hikes expired this year.

Next year’s average tax return is projected to be around $2,700, or roughly what filers received in 2021 (for their 2020 taxes), according to Steber. Refunds rely on a variety of criteria, including a taxpayer’s tax bracket and the presence or absence of dependent children.

Steber recommends the following rule of thumb: Do not use your tax return from earlier this year to estimate your refund in 2023.

03:17 The IRS announces modifications due to inflation.

“You will likely have a less pleasant experience than you did last year,” he said.

Nonetheless, taxpayers can improve their tax condition before the end of the year. You may, for instance, invest more in a traditional IRA or 401(k) to take advantage of its pre-tax contribution regulations; every dollar invested in one of these funds reduces your taxable income.

And if you have suffered financial losses this year, you may want to consider selling one or more of these investments in order to reduce your taxable income by up to $3,000.

Here are some of the 2022 tax changes that may affect your refund.

No stimulus check

The government did not release any stimulus cheques in 2022, with the third and last payment approved by the American Rescue Plan Act in the spring of 2021. Due to the fact that these checks were issued in 2021, they were reflected on tax returns filed in early 2022 and had an impact on tax refunds issued earlier this year.

Some taxpayers relied on their 2021 tax returns to claim further stimulus payments, resulting in larger refunds. For instance, children born in 2021 were not included in the third wave of stimulus payments because the IRS relied on tax returns from 2020 to determine eligibility; hence, the tax agency initially overlooked these youngsters. In contrast, parents were able to claim the third stimulus payment for their youngsters when they submitted their taxes earlier this year.

Reduced Child Tax Credit

In 2021, the Child Tax Credit was enhanced, with parents of children under age 6 receiving $3,600 and parents of children aged 6 to 17 receiving $3,000.

This tax benefit returned to its pre-pandemic amount of $2,000 per child, regardless of age, in 2022. This diminished tax benefit could have an effect on parents’ refunds, despite the fact that it is undoubtedly advantageous.

Some lawmakers and child advocates are advocating for the reinstatement of the larger CTC payments, with California Democrat Adam Schiff lobbying congressional leaders this week to extend the enlarged CTC. With Congress shortly departing for its holiday session, it is uncertain whether progress will be made on this topic.

Credit for Child and Dependent Care Expenses

The Child and Dependent Care Credit, which helps parents pay for child care, was increased to up to $8,000 per family under the American Rescue Plan.

Nonetheless, this tax credit has returned to its pre-pandemic level. Under present legislation, parents can claim a tax credit for up to 35% of up to $6,000 in eligible child care expenses for two or more children on their 2022 tax returns. That means the maximum credit for the current year is $2,100. (The sum is cut in half for parents with a single child.)

Credit for earned income tax paid

The Earned Income Tax Credit, or EITC, which is geared at low- and moderate-income employees, is also less generous this year.

During the epidemic, the EITC was increased for adults without children, a category of workers who generally do not benefit significantly from it. Low-income workers without children were entitled for a maximum $1,500 credit in 2021.

This year, the tax credit for this group reverts to a lesser amount: $560 in 2022.

In 2022, low-income parents who qualify for the EITC will receive slightly increased amounts due to annual adjustments for inflation. For example, qualifying parents with two children can receive $6,164 in EITC this year, compared to $5,980 in 2021.

 

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