It Has to Do With Stimulus

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The programs that helped families get through the pandemic no longer exist.

It’s only been four days since the IRS began accepting tax returns for 2022 income. They’re already warning that Americans may be surprised to see smaller refund checks deposited into their bank accounts.

There are four main reasons why.

1. Stimulus controls are gone

On March 12, 2021, the IRS began sending the last of three stimulus payments. However, due to various reasons, a large number of taxpayers have not received their payment. And some who did get them received a check for the wrong amount.

Those people were able to claim a tax refund when they filed their 2021 tax returns. If they needed to get a refund, the IRS would stack an additional $1,400 (or whatever amount was missing if they had previously received a partial check) per eligible recipient on top of their refund. Those dollars would help offset the amount owed if they owed the government money.

Let’s say a family of four moved and the IRS needed their current address, completely missing out on the $1,400 stimulus checks. They could submit a recovery rebate credit and could expect to receive $5,600 in addition to their regular refund.

Now that there is no incentive and no recovery discount credit, it’s back to their usual repayment amount.

2. The increased child tax credit has ended

Another program designed to help families deal with the financial impact of the pandemic was the Enhanced Child Tax Credit. In a typical tax year, a parent can deduct $2,000 per child as a child tax credit. It’s not much, but it’s meant to help with the high costs of raising a child.

During the pandemic, that amount rose from $2,000 to $3,600 per child under age 6. And for kids ages 6 to 17, it was raised to $3,000. Parents had two options: they could either wait and claim the full credit when they filed their taxes, or take the first half of the credit upfront, divided as monthly payments from July to December 2021. They would then be eligible to claim the back half of the credit. to claim credit. when they filed taxes.

While President Biden initially wanted the expanded child tax credit to run through 2025, Republican lawmakers voted it down and the program ended with the December 2021 payment.

Imagine a family with a 5-year-old and a 7-year-old who chose to file the entire credit at the time of tax return. That meant that when they filed taxes in 2022 for the 2021 tax year, they received an additional $6,600.

The good news is that the same family is looking at a $4,000 credit this year. Still, it may seem small compared to $6,600.

3. The pandemic-era charity tax break is a thing of the past

Typically, Americans can only deduct charitable donations from their taxes if they have enough deductions to itemize. Many Americans don’t have enough deductions to itemize or prefer to skip the work required to itemize and claim the standard deduction.

When Americans filed their taxes last year, it was for the 2021 tax year. Congress created a temporary tax break for those who made donations in 2021 but did not itemize their taxes. Instead of claiming nothing, a single tax claimant could claim a $300 deduction, and a married couple could claim $600.

That tax benefit is also gone.

4. 2022 was a wild year for investments

The stock market took a wild ride in 2022, dropping enough to make some investors nervous. Some of those same investors may be surprised to learn that they have a larger tax bill because of investment gains.

This is how it happened:

• An investor had a mutual fund directly (rather than in a tax-sheltered account).
• The market became volatile enough that mutual funds had to sell more of their holdings than usual. This included profitable participations.
• Once sold, the mutual fund distributed the profits back to the investors.
• Even though an investor’s overall portfolio appears to have lost money in 2022, there was a small gain. It’s those gains they need to pay taxes on or offset losing stock they sold last year.

The IRS has yet to say how much smaller they expect refunds to be this year, though the average refund for the 2020 tax year was $2,827 and for 2021 was $3,039. It’s safe to say that the IRS expects the average return to be lower than that.

While it’s bad news for many of us, knowing ahead of time can help us plan for a more realistic repayment.