The 2022 tax season has just begun, with taxpayers able to file their returns with the Internal Revenue Service (IRS) as of Jan. 24. The agency has warned about processing delays amid COVID, staff shortages, and an already-extensive backlog of returns from last year. But that's not all taxpayers have to prepare for. From stimulus payments to child tax credits, there were a number of alterations made to the tax code over the last couple years that will likely result in notable differences for returns in 2022. With that in mind, experts are warning people to prepare for one significant change this year. Read on to find out what you should be aware of when filing your tax returns.
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You should prepare for a smaller tax refund this year.
iStockDespite the fact that filing your tax returns can be a stressful experience, many of us look forward to tax season knowing we can expect to receive a sizable amount of money back from the IRS. According to the agency, last year's average tax refund was more than $2,800.
Unfortunately, tax experts are now warning some people to prepare to receive less refund money in 2022. "A lot of people will get their refunds and they won't get as much as anticipated," Toby Mathis, founding partner of Anderson Law Group and an expert on taxation, told CBS News.
There is one major factor that is likely to result in smaller returns.
iStockAccording to financial experts, there are a number of new factors affecting this tax season that could cause you to get a smaller refund, from paused student loan payments to unemployment benefits. But one of the biggest factors will be the child tax credit. In March, President Joe Biden signed the American Rescue Plan which increased the 2021 child tax credit from $2,000 to $3,000 per child age 17 and under, with an extra $600 for children under the age of six, according to CNBC.
Half of this payment was also automatically sent upfront last year—unless families chose to opt out of advanced credits—from July through December. So if you qualified for a $3,000 tax credit, you would have received $1,500 last year and will receive $1,500 as a refund this year when claiming the other half through your tax return. Some taxpayers might not realize this, as the new amount will be $500 less than the $2,000 credit they received last year, before the new plan.
"Working families are not expecting this," Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, told CNBC. "And it’s going to be a shock to them."
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You might also end up owing money back to the IRS.
iStockThe child tax credit could end up costing some taxpayers even more: Anyone who received an advanced payment under this credit but didn't actually qualify for it will end up owing the IRS that money back. As the agency states on its website, "if you received a total amount of advance Child Tax Credit payments that exceeds the amount of Child Tax Credit that you can properly claim on your 2021 tax year, you may need to repay to the IRS some or all of that excess payment."
"A lot of people could be in for a rude awakening this year," Christian Cyr, a CPA and president and chief investment officer at Cyr Financial, told CBS News. According to Cyr, one of his clients received $1,500 through the advanced child tax credit, even though his child had turned 18 in 2021—making him ineligible. Because the IRS gave out the credits based on 2020 returns, the child was listed as 17 and thus eligible.
"The IRS isn't smart enough to realize or didn't look into the date of birth, so they started dishing out $1,500 to my client through the advanced tax payments," Cyr explained. Now, the IRS will require taxpayers to repay the advanced payment if they were not actually eligible for it. That money will be deducted from your refund—but if it ends up being more than your refund can cover, you'll have to pay the rest back to the IRS directly.
The IRS is urging people to file their returns as early as possible.
iStockIf you are still expecting a refund this year—small or not—you should file your return as soon as possible to ensure you face fewer delays. The IRS is expecting more than 160 million individual tax returns to be filed this year, most before the April 18 tax deadline. According to the agency, the fastest refunds can be expected by filing electronically and accurately.
"IRS employees are working hard to deliver a successful 2022 tax season while facing enormous challenges related to the pandemic," IRS Commissioner Chuck Rettig said in a statement. "There are important steps people can take to ensure they avoid processing delays and get their tax refund as quickly as possible. We urge people to carefully review their taxes for accuracy before filing. And they should file electronically with direct deposit if at all possible; filing a paper tax return this year means an extended refund delay."
If there are no issues with your tax return, you should receive your refund within 21 days of filing electronically if you choose direct deposit. However, the IRS does note that the law prohibits it from issuing refunds that involve the earned income tax credit or additional child tax credit before mid-February. "The law provides this additional time to help the IRS stop fraudulent refunds from being issued," the agency states on its website.
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