According to a press release issued by the Internal Revenue Service, taxpayers should expect lower refunds this year than they received last year. This is due to a number of tax breaks that were extended for the 2021 tax year in order to provide a measure of relief to families hit hard by the COVID-19 pandemic.
However, those changes weren’t codified into law, so pre-pandemic rules will once again apply for 2022. To give you an idea of how much less money to expect, the IRS says the average refund was 14% higher in 2022 than in 2021 with the now-expired tax breaks in place.
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Specifically, here’s why your refund could be smaller.
The child tax credit provided up to $3,600 per child for those under the age of six in 2021 and $3,000 for children under the age of 18. That figure has reverted to the previous guidelines, specifying $2,000 for children under 17 in 2022. Those over 17 will no longer qualify for the family credit.
The child and dependent care credit was increased to $8,000 for 2021. Families with childcare expenses, such as daycare, babysitters, summer camps, and the like for kids 13 or younger, or a disabled dependent, qualified for that expanded credit. It has now retreated to its previous maximum of $2,100.
The earned income tax credit also shrinks for this tax season. Qualifying taxpayers caring for children were granted a credit of $1,500 for 2021. That number has decreased to $560 for 2022.
The charitable contribution deduction was extended to a wider pool of taxpayers during the pandemic even if they took the standard deduction— permitting deductions of up to $600 for married couples and $300 for individuals. Taxpayers must itemize to claim the charitable contribution deduction for 2022.
Economic impact payments were not issued in 2022, so the effect of them will not be reflected in tax refunds this year. . A large number of taxpayers received a $1400 stimulus check in 2021. While those funds were deposited directly into bank accounts or distributed as checks in most cases, they were issued as a rebate on 2021 tax returns in others.
Severance payments will be taxed for 2022. This break was extended during the pandemic to help those affected by the mass layoffs that occurred. It’s very possible that people who received such payments last year will find that the 2023 tax brackets will see them facing a higher tax burden.
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Given that we’re currently dealing with the highest inflation rates the nation has experienced in four decades, these new tax laws for 2022 are happening at a most inopportune time. The cost of living is higher across the board and these adjustments to the tax code could turn what might have been a refund into a tax bill.
As a result, credit card debt is likely to increase, as people who were counting on refunds to supplement their strained budgets will have to turn to credit instead. Those who already have more than $10,000 in unsecured debts might want to consider working with a debt relief company to help ease their financial burden.
Fortunately, there are a few rays of hope within all of that bad news.
People who purchased electric cars before August 16, 2022 can claim a $7,500 tax credit under the Inflation Reduction Act. The credit remains in place for vehicles purchased after that date if the cars were built in North America.
There is also still time to max out an individual retirement account (IRA) contribution for 2022. This can be done until April 18. Tax deductions of up to $7,000 for people over 50 and $6,000 for those up to age 49 will accompany contributions of those amounts. However, it should be noted that this possibility depends upon modified adjusted gross incomes and the existence of an employer-sponsored retirement plan at work.
It’s a good idea to consult a tax professional if you’re unsure where you stand with this year’s changes. Tax Day is April 18th. Residents of federal disaster areas will have until May 15th to file.
If you’re at a loss of how to deal with your debt, National Debt Relief can help. Our debt coaches can help you pay off your debt for less—in a shorter amount of time. Have questions during this tax time? We can help with that too.