You Might Get a Smaller Tax Refund This Year Due to the New Tax Law

This year, don't expect a large tax refund.
As Congress chose not to extend the tax breaks put in place during the Covid-19 pandemic as part of its year-end budget bill, many taxpayers will get smaller refunds when they file their tax returns for tax year 2022, tax preparers said. And some who received refunds in recent years may now have a balance due.
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Beth Logan, an enrolled agent with Kozlog Tax Advisers in Chelmsford, Mass., said that refunds could shrink by a few hundred to a few thousand dollars, depending on taxpayers’ situation. This includes whether they adjusted the amount they asked their employer to withhold in taxes and whether they paid estimated taxes. Last year, the average individual tax refund was $3,176, which is 14% higher than the $2,791 refund during the 2021 tax season, according to Internal Revenue Service statistics.
The IRS typically starts accepting individual tax returns in late January. This year, tax day is Tuesday, April 18. Even if you go on extension until Monday, Oct. 16, you still have to pay any tax you expect to owe by April 18. Otherwise, the IRS will add penalty and interest charges to the amount owed.
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There are a few things that could change your tax bill and potentially reduce your refund this year. Here are some of them:
Some taxpayers received their 2021 stimulus checks automatically, while others got the money as a recovery rebate credit of $1,400 per person on their 2021 income tax return. For a family of four, that could have meant a $5,600 credit on their 2021 taxes that won't be on this year's return.
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More than a dozen states issued taxpayers rebates and refunds in 2022. Although these payments won’t count as taxable income on state returns, they often will count as taxable income on federal returns. For example, California has sent tens of millions of taxpayers payments ranging from $200 to $1,050. The IRS may count these payments as income on federal returns, says Kathryn Zdan, an enrolled agent and tax editor at Spidell Publishing in Anaheim, Calif.
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Congress did not extend the temporary tax break that allowed a special charitable deduction for taxpayers who take the standard deduction instead of itemizing. This means that the $300 deduction individuals could take, or $600 for married couples, is not available for tax year 2022 and could result in a small increase in tax bills.
Taxpayers with dependent children need to be aware of changes to the child tax credit for 2022. The credit has reverted to $2,000 for children under age 17, a significant decrease from the enhanced credit of $3,000 for children under age 18 and $3,600 for children under age 6 in 2021. If you included two children as dependents when you initially filled out a W4 tax withholding form at work and your children have since aged out, make sure you update your W4 so your employer will withhold more in taxes, Ms. Logan says.
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The tax credit for child and dependent care expenses, such as daycare, was increased to a total of $8,000 for 2021 but went back to the old limit of $2,100 for 2022. Those who took the maximum $8,000 credit (up to 50% of $16,000 in expenses for two or more children) last year and the maximum $2,100 credit (up to 35% of $6,000 in expenses for two or more children) this year are likely to see a much lower refund, according to tax expert Ms. Logan.
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Similarly, taxpayers whose employers offer pretax child and dependent care flexible spending accounts may see lower refunds because the contribution limits for those accounts were increased for 2021. The new limit is $10,500, but it will revert to the old limit of $5,000 in 2022.
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Last year, some mutual funds sold more holdings than usual and distributed gains to investors. That could mean bigger tax bills and smaller refunds for individual investors this tax season, even though their portfolios shrank. “Investments can throw you off,” said certified public accountant Mary Logan. In the case of a new client last tax season, Ms. Logan said he made $80,000 in the stock market in 2021 and owed $16,000 in taxes he hadn’t counted on in the 2022 filing season. There is still time to pay fourth-quarter estimated tax payments through Jan. 17 and lessen penalties and interest owed.
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Investors who sold cryptocurrency or tech stocks at a loss can use those losses to offset gains and up to $3,000 of ordinary income. This offset could leave someone with a bigger refund.