The IRS has reported that many people should expect smaller tax refunds for 2022. Here’s why your refund may not be as big as it was last year, and some tips on what you can do to maximize your refund amount.
Why are you receiving a tax refund from the IRS?
Let’s review why we get a tax refund in the first place. What affects the amount you receive when you file your return?
For many people, your tax refund is exactly what it sounds like: a refund of the taxes you overpaid during the tax year. This may be due to withholding more tax than you owe from your regular paychecks or overestimating your self-employment taxes.
Qualifying for a refundable tax credit may also contribute to the amount of your refund. When the amount of a refundable credit exceeds the tax you owe, you receive the excess credit as a refund. For example, if you owe $400 in taxes and qualify for a $1,000 credit, you will receive the remaining $600 as a refund.
Why you could get a smaller tax refund for 2022
Reason 1: Expiration of pandemic relief measures like the Child Tax Credit and more
This is the number one reason why you may receive a smaller refund this tax season.
Due to the pandemic, many tax credits have been extended for tax year 2021, increasing the amounts of the credits and making some previously non-refundable credits. However, most of these upgrades expired in 2022, making some credits less valuable than the previous year.
We’ve put together a table comparing specific tax credit amounts changed by the COVID-19 relief measures and how they have changed for 2022:
|Child Tax Credit (CTC)||Maximum credit amount $3,000-$3,600 depending on the age of the child
|Maximum credit amount $2,000 regardless of the age of the child (must be under 17 years of age)
Up to $1,500 refundable
|stimulus payments||Available to claim as the Recovery Refund Credit on your tax return||No recovery rebate credit as no stimulus payments were made in 2022|
|Earned Income Tax Credit (EITC)||The maximum amount of credit for taxpayers without children was $1,502
|The maximum amount of credit for taxpayers without children is $560
|Child and Dependent Care Credit||The maximum amount of qualified expenses you can claim was $4,000 for one qualifying child or $8,000 for two or more qualifying children
Refundable to qualified taxpayers
|The maximum amount of qualified expenses you can claim is $3,000 for one qualifying child or $6,000 for two or more qualifying children.
no longer refundable
|charitable contributions||$300-$600 deduction available for those who claimed the standard deduction (deducting more tax requires itemizing)
Deductible donations up to 100 percent of your adjusted gross income
|Only available if you itemize your deductions
Deductible donations once again limited to 60 percent of your adjusted gross income
If you claimed one or more of the tax breaks listed above, you could see a significant decrease in your refund this year.
Reason 2: The current economic environment
Any other factor that could affect the amount of your refund? The economy.
Here are some factors to consider:
- Inflation – The IRS adjusts many figures for inflation annually, such as expanding the income ranges for each tax bracket. However, not all tax breaks take inflation into account. A big one that may affect you this year is the capital loss deduction, which allows investors with net losses to reduce their taxable income by up to $3,000 per tax year. This amount remains unchanged from the previous year, despite the increase in prices.
- layoffs – If you were laid off in 2022 and received severance pay, it could affect your taxes. Severance payments are taxable, so receiving one could put you in a higher tax bracket.
- The stock market – If you were forced to sell investments last year to break even, you may be required to pay capital gains taxes that can increase your tax liability (if you sold the asset for a gain).
This may have a minor impact on your tax refund, depending on your situation, but it’s still good to keep these factors in mind.
Tips to help you maximize your 2022 tax refund
So what can you do to make sure you’re not caught off guard with a significantly smaller refund or even an unexpected tax bill this year? Keep the following tips in mind as you present this season.
1. Know what tax credits you qualify for
Make sure you know which tax breaks are available to you and how much each is worth this tax season.
In addition to the expiration of pandemic relief measures, new tax breaks are available this year; certain states are offering tax rebates or deductions. Some states have even expanded their existing EITC and CTC programs or created new ones.
There have also been changes to some existing tax credits this year, such as the credit for the purchase of certain electric vehicles.
If you file electronically with TaxAct®We can help you in this area: Our interview questions are designed to pinpoint the tax benefits you may qualify for, and we’ll help you complete the paperwork necessary to claim them.
2. File your taxes early
Filing as soon as possible helps in two ways: You’ll get your refund faster, and you’ll have more time to prepare and pay your tax bill if you owe taxes.
If you file electronically, you should receive your tax refund within 21 days. If you end up owing taxes, you have until the filing deadline of April 18 of this year to pay the taxes you owe. That’s why filing early can be beneficial if you end up with an unexpected tax bill: it gives you more time to plan and pay the cost.
3. Contribute to a retirement account or health savings account
Another way to reduce your taxable income is to contribute to an individual retirement account (IRA) or health savings account (HSA).
Traditional IRA contributions may be deductible based on your modified adjusted gross income (MAGI). You can contribute up to $6,000 by 2022, which could reduce your gross income by that amount.
Don’t forget to also maximize your HSA contributions. In 2022 you can contribute up to $3,650 for a single plan and up to $7,300 for a family plan.
You have until Tax Day, April 18, to make IRA or HSA contributions for tax year 2022.
4. Use cryptocurrency and stock losses to your advantage
If you sold cryptocurrency or other investments at a loss last year, you could use your losses to offset any gains you’ve made. If you have no earnings to make up for, you can deduct up to $3,000 in losses to reduce your taxable income.
5. Use our Refund Booster to prepare for next year
While you may not be able to change your tax situation this year, set yourself up for success next year by taking advantage of our refund booster1.
Form W-4 underwent changes beginning in tax year 2020. The changes were intended to help you “balance” your taxes, meaning you would end up with as close to zero a tax liability as possible.
Refund Booster can help you fill out your Form W-4 to get a bigger refund at tax time or put more of that refund into your paycheck throughout the year. Either way, you are in control.
Know what to expect from your refund
Don’t be surprised by a smaller tax refund this year. The expiration of pandemic relief measures and the state of the economy could drastically alter the amount of your refund compared to 2021, so keep these factors in mind when planning your refund this season.
Most importantly, don’t expect your refund to look the same as last year, especially if you claimed credits like the Child Tax Credit or canceled charitable contributions. To maximize your 2022 tax refund, try contributing to an IRA or HSA or use capital losses to reduce your taxable income.
And don’t forget to file your return early; this gives you more time to prepare for any potential tax bills on the horizon.
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