Official tax-filing season kicks off Monday, January 23, and it may hold some surprises for your wallet.
So, whether you expect to file your 2022 federal income tax return right away or wait until the last minute, now is a good time to get a sense of whether you’ll owe more money to the IRS, or whether you’ll likely get a refund and if so, how much.
Here’s why: The amounts might be very different than they were last year. Several popular tax breaks have changed since you filed your 2021 return. And your financial circumstance may have altered too, if you sold any assets or were laid off.
If it turns out you will owe additional money to the IRS, and need some time to get the funds together, “You still can file but set your payment to go on April 18,” said Kathy Pickering, chief tax officer at H&R Block. (If you pay later than April 18, you may be subject to penalties and interest.)
Why some may get a smaller refund
Most Americans get a federal tax refund every year, and for many that refund is a big boon to their finances.
But that boon may be smaller this year, in part due to the expiration of some tax-break enhancements that were in effect the previous tax year.
Child tax credit: For tax year 2022, parents may claim a maximum child tax credit of $2,000 for each child through age 16 if your modified adjusted gross income is below $200,000 ($400,000 if filing jointly). Above those levels, the credit starts to phase out. And the portion of the credit treated as refundable — meaning it is paid to you even if you don’t owe any federal income tax — is capped at $1,500, and that is only available to those with earned income of at least $2,500.
But that’s well below the now-expired enhanced child tax credit that was in effect for 2021. Among other things, it was fully refundable with no earned income requirements, Pickering noted. And the enhancements let parents claim a maximum credit of $3,600 for every child under age 6 and up to $3,000 for children ages 6 through 17.
Child and dependent care credit: The tax credit that working parents use to help pay for child care or that filers claim to pay for the care of an adult dependent is also notably lower for tax year 2022. That’s because Congress let the 2021 enhancements to it expire.
On your 2022 return, for example, you may claim a maximum of 35% on up to $3,000 in expenses for one person, or up to $6,000 of expenses for two or more people. It is a non-refundable credit, meaning you may only claim it if you have federal income tax liability to offset.
For tax year 2021, by contrast, the credit was fully refundable and was worth a maximum of 50% on up to $4,000 in expenses for one person or up to $16,000 for two or more.
Here’s how much of a difference that makes, Pickering said. This year, if you have one child or dependent, you can only get a maximum credit of $1,050 ($2,100 for two or more). By contrast, last year your credit would have been $4,000 (or $8,000 for two or more).
Earned Income Tax Credit for those without children: The EITC, which is a refundable credit, has been a way to financially help low- and moderate-income workers (defined in 2022 as those with earned income under $59,187), and especially filers with children.
The EITC is also available to earners without qualifying children. But the size of the credit for someone in this group is just $560 for 2022. That is almost $1,000 less than the $1,502 they were allowed to claim in 2021 as a result of a one-year enhancement that was part of the American Rescue Plan.
Charitable deductions: In order to justify itemizing your 2022 deductions, which include charitable contributions, they will need to exceed the standard deduction of $12,950 for single filers or $25,900 for those married filing jointly.
Most filers don’t itemize. That typically means any charitable contributions they made during the year aren’t reported on their returns because they got subsumed under the standard deduction.
But for tax years 2020 and 2021, filers were allowed to take what’s called an above-the-line deduction for charitable contributions up to $300 ($600 if married filing jointly) in addition to the standard deduction.
That above-the-line deduction, however, has expired.
Severance payments: If you were laid off last year and received a lump sum payment for severance, that money will be taxable in 2022. So if it happened late in the year, that may bump your 2022 income into a higher bracket, much the way a big one-time bonus might.
Or if you got unemployment benefits, make sure the state was withholding taxes on those payments. If not, that could mean you might have to send the IRS a check, Pickering noted.
Ways to potentially increase your refund or reduce your 2022 tax bill
Tax year 2022 is over, but there still may be a few things you can do now to increase the money the IRS sends you or reduces the amount you will owe.
Review last year’s return: While several tax breaks are less generous now, review your 2021 return to make sure you claimed all the enhanced ones you were eligible for, Pickering said.
If you didn’t claim them, “file an amended return for 2021,” she suggested.
Use your capital losses: If you sold assets in 2022 at a gain, you will owe tax on that gain. Unless, that is, you sold other assets at a loss that was equal or greater in size to your gain. Your losses can offset your gains dollar for dollar. And if you still have losses left over after doing that you may also apply them against $3,000 of your ordinary income for 2022. Any excess losses beyond that may be used in future tax years.
If all you did was book capital losses this year, you can still offset your income up to $3,000 and carry forward the rest.
These loss rules also apply to crypto losses.
Make an IRA contribution: You still may make 2022 contributions to an IRA up until April 18, 2023. The annual limit on those contributions is $6,000 ($7,000 if you’re 50 or older).
Your contributions may be deductible if you make them to a traditional IRA. But how much is deductible depends on two things: Whether you have access to an employer-sponsored plan at work and your modified adjusted gross income.
To get the full deduction, neither you nor your spouse can be covered by a retirement plan at work. Or, if you do have access to a workplace plan, you can still take the full deduction if modified AGI is $68,000 or less ($109,000 or less if married filing jointly).
But if you have access to a plan and your income is higher, the math is different. You can get a partial deduction if your modified AGI is over $68,000 but below $78,000 (over $109,000 but below $129,000 if a joint filer).
If your income tops $78,000 (or $129,000), however, you may not take any deduction.
Max out your Health Savings Account contributions: If you already opened a Health Savings Account last year and are covered by an HSA-eligible health plan, you may still make your deductible 2022 contributions until the April 18 tax filing deadline.
The maximum you may contribute is $3,650 for single coverage, or $7,300 for family coverage. Anyone who was 55 or older by the end of December may contribute another $1,000.
The IRS starts accepting 2022 tax returns Monday. Jan Lewis of the American Institute of CPAs says some taxpayers might receive smaller refunds as many pandemic-related breaks are no longer available.Why are business expenses lowering my refund? ›
Generally, this happens when certain credits are involved - most commonly the Earned Income Credit (EIC). At certain income levels, the amount of EIC will fall as your income decreases. So, with each business expense, you are reducing your taxable income, which will then reduce the amount of your EIC.Why does my refund status say it may be reduced? ›
If your refund was less than you expected, it may have been reduced by the IRS or a Financial Management Service (FMS) to pay past-due child support, federal agency nontax debts, state income tax obligations, or unemployment compensation debts owed to a state.Will I get a smaller tax refund in 2022? ›
The IRS starts accepting tax returns for 2022 earnings on Jan. 23, and it will issue tax refunds in the weeks and months that follow. And some of us could be in for a surprise. "People should absolutely expect smaller tax refunds this year.How do I get the biggest tax refund? ›
- Select the right filing status.
- Don't overlook dependent care expenses.
- Itemize deductions when possible.
- Contribute to a traditional IRA.
- Max out contributions to a health savings account.
- Claim a credit for energy-efficient home improvements.
- Consult with a new accountant.
(The amount depends on your filing status. In 2021, it's $12,550 for single filers, $25,100 if you're married filing jointly, and $18,800 if you're a head of household.) You'll have to choose between taking these write-offs individually — itemizing them — or taking the standard $12,550.Do you get money back on taxes for business expenses? ›
If you own a pass-through business and your estimated tax payments and tax withholding exceed the tax due on your return, you can receive a tax refund. Only C corporations pay income taxes directly, so C corporations are the only businesses that can get a refund.Why did the IRS send me less than my refund? ›
Why is my refund different than the amount on the tax return I filed? All or part of your refund may have been used (offset) to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans.Why was my federal refund reduced 2022? ›
Many taxpayers may be surprised that the amount of their 2022 tax return is lower this filing season, leaving them to wonder, “Why is my tax refund so low?” This may be due to certain tax credits reverting to the rules in effect prior to 2021 and the expiration of the Recovery Rebate Credit.Why is my tax refund so low 2022? ›
For tax year 2022 some tax credits that were expanded in 2021 will return to 2019 levels. This means that affected taxpayers will likely receive a smaller refund compared with the previous tax year.
The IRS has pointed out that another reason why you may receive a lower refund this year is because there wasn't any stimulus payment in 2022.Why is my tax refund less than what I filed 2022? ›
Why is my refund different than the amount on the tax return I filed? All or part of your refund may have been used (offset) to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans.Why is my tax return so low in 2022? ›
For tax year 2022 some tax credits that were expanded in 2021 will return to 2019 levels. This means that affected taxpayers will likely receive a smaller refund compared with the previous tax year.Are tax refunds lower this year? ›
Due to tax law changes such as the elimination of the Advance Child Tax Credit and no Recovery Rebate Credit this year to claim pandemic-related stimulus payments, many taxpayers may find their refunds somewhat lower this year.