Americans will be unpleasantly surprised to find their tax refunds smaller than expected for 2022, with the IRS announcing reduced refunds for the coming year as well, in a blow to many who rely on the refunds as a supplement to their savings.
“In addition, taxpayers who don’t itemize and take the standard deduction, won’t be able to deduct their charitable contributions,” the release said.
According to analysts, 2021 pandemic-related government initiatives and recently passed changes to the tax code are some of the reasons for lower tax refunds.
The U.S. Department of Education suspended all student loans, along with interest accruals, during the pandemic lockdowns leading to the $2,500 above-the-line deduction being rendered worthless during the period. This means that consumers no longer have the option to reduce deductions from their gross income, leading to higher taxable income and smaller refunds.
In March 2021, child tax credit was increased from $2,000 to $3,000 for every child aged 17 and under, plus an additional $600 for children under six years old, under the American Rescue Plan. The rise in child tax credit will discount tax refunds for many U.S. citizens.
Changes in Tax Code
The American Rescue Plan Act dropped the reporting threshold for third-party payment-processing networks for business owners from $20,000 to $600. This has become an additional burden for taxpayers.The IRS has requested more time from citizens who claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) for detecting fraud. Tax refunds and returns are not expected to be released until mid-February.
A study from H&R Block revealed that 73 percent of consumers who struggle financially depend on tax refunds for saving purposes.