YOUR TAX REFUNDS MAY BE SMALLER THIS YEAR

Credits that were expanded as part of pandemic relief have expired, as well as the tax break for charitable donations for people who don’t itemize

With the expiration of more generous tax credits offered as pandemic relief, many taxpayers could see “significantly smaller” refunds this year, the IRS says. In some instances, taxpayers may owe money.

The federal government temporarily expanded several tax credits for 2021 to help support families during the depths of the COVID-19 pandemic. But Congress declined to make the changes permanent, so the credits reverted to prepandemic levels for 2022.

The child tax credit, available to working parents who meet certain income and other rules, provided as much as $3,600 per child in 2021. About 61 million children benefited, according to the Treasury Department. But for 2022, the credit returned to a maximum of $2,000 per child for eligible families. That means a family with three children may have received as much as $10,800 under the expansion but would get at most $6,000 in 2022.

“That’s a big, noticeable difference,” said Melanie Lauridsen, director of tax practice and ethics for the American Institute of Certified Public Accountants.

For the earned-income tax credit, available to low- and moderate-income workers, a qualifying taxpayer with no children who received about $1,500 in 2021 would now receive $560, according to the IRS. And the child and dependent care credit, available to those who need care for family members while they work, returned to a maximum of $2,100, from $8,000 in 2021.

The changes could shrink refunds or possibly result in a balance due in some cases.

Taxpayers may also see reduced refunds this year because of the end of COVID relief stimulus payments, also known as economic impact payments. The third and final payment, of $1,400, went out to most eligible people automatically starting in March 2021. But those who didn’t receive it could claim it as a recovery rebate credit on their 2021 tax return, so it would reduce their tax bill or be included in their refund when they filed their return in 2022. But there were no stimulus payments last year, so no recovery rebate credit is available on 2022 returns, said Kathy Pickering, chief tax officer at H&R Block. “There have been a lot of changes, with the expiration of COVID relief programs,” she said.

Filers may want to have their returns prepared early in the filing season so they can adjust their budget if their refund falls short of expectations. “Knowing where you stand lets you make appropriate decisions,” Pickering said.

If you do owe money, don’t panic, she said. You can file your return when the IRS begins accepting them, but you don’t have to pay the tax until the filing deadline in April. That gives you about three months to save up the money. If you don’t have the full amount, you may qualify for a payment plan.

Also in 2022, some states with budget surpluses have been issuing tax rebates to residents. While there has been some confusion about whether such payments count as taxable income on 2022 federal returns, that is not the case, said Richard Auxier, senior policy associate at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

Other changes this year include the end of a tax break for charitable donations for people who don’t itemize, or detail, their various tax deductions. Last year, filers who chose the standard deduction — a flat amount that reduces taxable income — could claim a charitable deduction of up to $300 per filer. But now only filers who itemize can deduct their charitable contributions. “That doesn’t exist in 2022,” said Tom O’saben, director of tax content and government relations for the National Association of Tax Professionals.

At the same time, taxpayers are facing what will probably be another tax season with subpar customer service from the IRS — this after enduring two seasons of pandemic-fueled disruptions at the agency.

The IRS is “poised to start the 2023 filing season in a stronger position,” thanks to a reduced backlog of paper tax returns and newly expanded staff, according to a report to Congress this week from Erin M. Collins, the national taxpayer advocate. Collins heads a group within the IRS that works on behalf of taxpayers.

Filers should “do everything they can” to file returns electronically, check returns for accuracy and arrange for direct deposit of refunds to avoid delays, Collins said in an interview. Last year, her report said, refunds for paper returns were delayed by six months or more.

The IRS said in an announcement Thursday that it expected taxpayers to experience improvements this tax season and that most people who file electronically should get a refund within 21 days.

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