Getting a tax refund is a highly anticipated event, with 3 out of 4 taxpayers typically receiving a check from the IRS after filing their tax return. But this year, tax experts warn some people may receive a smaller-than-normal check.
The biggest issue that could impact tax refunds is the enhanced child tax credit, tax experts note. The IRS has yet to say when it will start accepting tax returns, but it typically opens new returns around the end of January.
People get tax refunds if they paid more to the IRS throughout the year than they owe. The tax office then cuts a check for the difference.
Some taxpayers may also claim tax credits, which are a dollar-for-dollar reduction in the amount you will owe to the IRS. These credits are generally intended for specific groups of taxpayers, such as parents, students or low-income workers.
This is where the child tax credit comes in.
Under President Joe Bidenthe Child Tax Credit (CTC) was increased from $2,000 per child to $3,600 for each child under age 6 and to $3,000 for those age 6 to 17. when they file their returns.
Indeed, half of the expanded CTC was paid in advance by monthly checks from July 2021 to December 2021 – and parents will claim the other half of the tax credit on their tax returns before the deadline for filing the tax credit. April 18, 2022. (IRS offices will be closed this year on the traditional tax deadline of April 15 for Emancipation Day, pushing the filing deadline to 18 this year.)
In other words, instead of obtaining a tax credit of $2,000 as in previous years for their children, parents will claim $1,500 or $1,800 per child, depending on the age of their child.
Take a family with two children aged 8 and 10: when the parents file their application, they claim a tax credit of $3,000 for the two children (which is half of the combined tax credits of $6,000 $ offered for two children under the expanded CTC). Yet that actually means a $1,000 drop in tax credits from the previous tax year, when they would have claimed $4,000 for their two children. The result could be a lower tax refund in 2022, tax experts say.
“A lot of people will get their refunds and they won’t get as much as expected,” noted Toby Mathis, founding partner of Anderson Law Group and tax expert. “The people it will hurt are those who anticipate the total amount, unaware that the money they received [in 2021] was an early repayment of the tax credit.
To be sure, some parents were aware of this issue and opted out of receiving the monthly advance payments because they’d rather get a larger refund, said Mark Steber, director of tax information at Jackson Hewitt.
“Some people want to get the full tax credit when they file their claim, or they weren’t sure if they were eligible,” Steber explained. “A lot of people have taken advantage” of the IRS portal to opt out of prepayments.
At the same time, some parents and taxpayers could end up with larger tax refunds.
Below are some of the scenarios where people could get bigger or smaller tax refunds this year due to tax code changes in 2021. There’s just one big caveat: every tax situation is unique as tax refunds depend on a number of factors such as income tax brackets as well as tax credits and deductions such as pension contributions.
Lower reimbursement: the impact of CTC
For the reason mentioned above, some parents may get a lower CTC tax credit when they file their tax returns this year, reducing their usual tax refund.
But there are other issues with the CTC that could also eat away at a taxpayer’s refund, tax experts said. Among them are people who received the enhanced CTC payments for a child but did not qualify.
“A lot of people could have a rude awakening this year,” said Christian Cyr, CPA and president and chief investment officer at Cyr Financial.
One of his clients had a child who turned 18 last year, but because IRS CTC eligibility was based on 2020 returns, it turned out the child was 17. “The IRS isn’t smart enough to realize or haven’t looked at date of birth, so they started paying my client $1,500 through tax prepayments,” Cyr said. He said, ‘What does that mean?'”
The answer, Cyr said, is that the parent will have to repay the CTC advance payments. In this case, the IRS would reduce a taxpayer’s refund amount to recover the overpayment.
Likewise, some parents who are divorced or who share custody of a child may be required to repay if it was not their year to claim the child as a dependent. The parent who declares the child as a dependent for 2021 will receive the CTC instead, and if the other parent received the checks in error in 2021, they will have to refund the money.
Larger reimbursement: Parents with a child born in 2021
Some people could be likely to see a bigger refund in early 2022, including families who welcomed a child into their family in 2021, tax experts said.
Indeed, the IRS based its eligibility for the advanced CTC payments, as well as the third stimulus check (worth $1,400 for each eligible adult and child), on 2019 or 2020 tax returns. The IRS would therefore not have been aware of babies born in 2021 and would not have directed CTC advance payments for these children.
Families with babies or children born, adopted or fostered in 2021 will be able to claim the full enhanced CTC credit on their 2021 tax returns, which will give them a credit of $3,600 per child. On top of that, they should also be able to receive $1,400 in stimulus checks for the child, Jackson Hewitt’s Steber said. Together, these measures could increase a family’s tax refund by $5,000 per child.
Larger Reimbursement: Working Parents with Children in Child Care
A big change in the tax code that isn’t as well known as the Child Tax Credit is the Child Care and Dependent Care Credit, which was expanded through the US bailout. .
Previously, parents who paid someone to care for their child while they worked or looked for work could claim a tax credit of up to $3,000 per dependant. But the US bailout increased that credit to $8,000 per child – with a maximum of $16,000 for two dependents.
There are certain limitations. The child must be under the age of 13 or a person who is not mentally or physically able to care for themselves, lives with the taxpayer for more than half the year and is a dependent. Additionally, one parent — or both parents, if filing jointly — must have earned income in 2021 to claim the tax credit.
Not all child care expenses are considered eligible by the IRS, which indicates that overnight camps and private schools are not covered by the tax credit. But paying a parent to care for a child while you or your spouse works is considered an eligible expense — as long as that parent isn’t also a dependent (like an older sibling).
For eligible families, the tax credit will provide a dollar-for-dollar reduction in their tax liability. It is also refundable, which means that even if the tax credit exceeds your federal income taxes, you will get the extra amount in your tax refund.