Your tax refund may be smaller this year.

In this article, we will discuss changes in tax laws that may lead to a decrease in your tax refund this year. We will cover several important points including the reduction of the child tax credit, the reduction of the child and dependent care credit, the restoration of the earned income credit to pre-pandemic numbers, and the disappearance of the tax deduction for charitable donations for individuals using the standard deduction. Finally, we will provide some tips to help you improve your tax situation.

Reduction of the Child Tax Credit

In 2021, the child tax credit was increased to $3,600 for children under 6 years old, and $3,000 for children aged 6 to 17, as part of the American Rescue Plan to help people deal with economic issues related to the pandemic. However, this year, the child tax credit has decreased to $2,000, which means that parents, especially those with young children, may face a much larger tax bill than last year. H&R Block expects that the reduction in the child tax credit will have the largest impact on tax bills for taxpayers.

Reduction of the Child and Dependent Care Credit

The child and dependent care credit was also temporarily increased to help families cover the costs of child care during the pandemic. In 2021, you could claim up to $8,000 for one qualifying individual and $16,000 for two or more, at a rate of up to 50% of your total child care expenses, according to the IRS. This year, the child and dependent care credit will decrease to $3,000 for one individual and $6,000 for the care of two or more individuals. While the credit was fully refundable last year, this year you will only be able to offset taxes owed with the credit, so if your tax bill is lower than the credit, you will only receive a refund for the actual taxes you paid.

Restoration of the Earned Income Credit to Pre-Pandemic Numbers

This year, the earned income credit is returning to pre-pandemic numbers. This credit is claimed by individuals earning less than $59,187, and it was increased to $8,000 in 2021, but it will revert to $2,100 as it was in previous years.

Disappearance of the Tax Deduction for Charitable Donations for Individuals Using the Standard Deduction

In recent years, donating to charities provided greater benefits than just the feel-good factor. In the past few tax years, you could claim a tax deduction for charitable donations of $300 for single individuals and $600 for married couples, even if you relied on the standard deduction. This year, this provision disappears, and you will only be able to claim a tax deduction if you are someone who itemizes your tax deductions.

How to Help Your Tax Situation

If you are worried that your taxes may be higher this year, look into ways that can help you reduce your overall tax bill. If you find yourself owing taxes and do not have savings to help you for a rainy day, you can request a payment extension or a payment plan. You will still owe interest, but it will help ease the burden on your wallet when paying taxes.

Source: https://www.realsimple.com/your-tax-refund-may-be-smaller-this-year-7198098