As the tax season for the year 2022 begins, many Americans are bracing themselves for smaller tax refunds, shrunken tax credits, and deductions. The IRS starts accepting tax returns for 2022 earnings on January 23rd, and it will issue tax refunds in the weeks and months that follow.
According to financial expert Lynnette Khalfani-Cox, “People should absolutely expect smaller tax refunds this year and some people might even owe money to the government.”
What are the reasons behind smaller tax refunds this year?
The main reasons for smaller tax refunds, according to financial expert Lynnette Khalfani-Cox are the following: there are no more stimulus checks, the enhanced child credit is gone, a special pandemic-era tax break for charitable deductions has been nixed, and some people might pay taxes on investment gains, especially if they own mutual funds that need to sell off stocks.
The IRS advises taxpayers to file their federal tax returns electronically to avoid being part of the agency’s large backlog. Electronic filing allows for refunds to be received within 21 days if the return has no issues and if the person chooses direct deposit. Those who submit returns on paper are more likely to join the agency’s backlog.
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The government’s response to the COVID-19 pandemic resulted in many Americans receiving $1,400 stimulus checks in 2021. However, this is no longer available for people dealing with 2022 taxes.
Additionally, many families with two children under 6 years old won’t be able to count on an extra $3,200 worth of tax credits that helped them last year. Now that the child tax credit is going back down in 2022, the amount is reverted back to $2,000.
Taxpayers can deduct charitable donations on their federal income tax return if they itemize their deductions, rather than taking the standard deduction. However, a special temporary tax break changed that for returns covering 2021. Khalfani-Cox said that a $300 amount will be deducted for people who don’t itemize and a $600 amount deduction for married couples. But Congress didn’t extend this deduction in 2022.
On the investment gains front, 2022 was a wild year on Wall Street and the Dow was down, the Nasdaq was down. So people might be thinking, ‘Why am I having a bigger tax bill to pay when the market was down?’ Due to market volatility, many mutual funds were forced to sell more of their holdings than usual, including profitable ones, and distribute the gains to investors. If these investors hold the fund directly, rather than in a tax-sheltered account such as a Roth IRA, they will have to pay taxes on the gain they received.
In conclusion, many Americans should expect smaller tax refunds this year and may even owe the government money. It is important to file taxes electronically and be aware of the changes in child tax credits, charitable deductions, and investment gains. It is also important to seek the advice of a financial expert or professional if unsure about how to navigate these changes.
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