Expecting a tax refund this year? As of December 2021, the IRS had issued over 169 million tax refunds for the current tax year, including those filed by individuals who were not required to file but chose to do so to claim economic impact payments. The average refund in 2021 was $2,879. But if you were hoping for a big tax refund in 2022, you might be surprised. Here are some potential reasons your refund may be less than you expected.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 may limit the amount of tax refund you receive at least until 2025. The tax changes made by the TCJA eliminated some deductions including moving expenses, casualty losses, job search expenses, and unreimbursed employee expenses like travel and meals. The IRS allows individuals to deduct charitable contributions made in 2021 up to 100% of adjusted gross income. The IRS increased the standard deductions for 2021, including $12,550 for individuals and married couples filing separately, and $25,100 for married couples filing jointly. They will increase again in 2022 to adjust for inflation.
Changes in Tax Brackets
Tax reforms included a major change to tax brackets. Tax laws maintained seven brackets but changed the marginal tax rates within each. For 2021, personal income tax rates range from 10% to 37%, depending on your income. The corresponding tax rates remain the same in 2022. If you are earning more money and have fewer deductions to claim, it could be a double whammy if it results in an increased taxable income for the year. This could mean, in addition to a higher tax rate, that you will get a smaller tax refund than you expected.
Planning for Next Year
If you’re unhappy about not receiving a larger tax refund this year, it’s never too early to think about your tax planning efforts for next year. Here are some tips to increase your tax refund or reduce the likelihood of owing money: Contribute to a Health Savings Account (HSA) if you have a high-deductible health plan, as these contributions reduce your taxable income. Direct tax-free money to a Flexible Spending Account (FSA) if you have one of these accounts instead. Open a traditional IRA or increase contributions to your 401(k), both of which can reduce your taxable income. Increase your charitable donation efforts to benefit from a larger deduction for those contributions. Use the IRS EITC assistant tool to determine if you qualify for the Earned Income Tax Credit. Utilize losses in your taxable investment account to offset any taxable capital gains.
Frequently Asked Questions (FAQs)
Why is my tax refund lower compared to previous years?
The Tax Cuts and Jobs Act (TCJA) of 2017 made significant tax changes that cut many notable deductions in the process, including: unreimbursed employee expenses like travel and meals, job search expenses, tax preparation fees, casualty and theft losses, except for losses occurring in formally declared disaster areas.
Additionally, the personal exemption for local and state taxes has been capped at $10,000 until 2025.
How
Can I get a larger tax refund?
Choose the most suitable filing status according to your financial situation to help reduce taxes and increase your tax refund. Be sure to claim the Earned Income Tax Credit (EITC) if you qualify. This tax credit helps individuals reduce their federal income tax liability by a certain amount that is determined annually. You may even receive a tax refund if you do not owe any tax.
Was this information helpful?
Thank you for your feedback! Let us know why!
Sources:
IRS. “Filing Season Statistics for Week Ending December 3, 2021.”
IRS. “Tax Reform Basics for Individuals and Families.”
IRS. “Question: Are child support payments deductible by the payer and may the payer claim the child as a dependent?”
IRS. “Instructions for Form 3903 (2020), Moving Expenses.”
Tax Policy Center. “How Did the TCJA Change the Standard Deduction and Itemized Deductions?”
IRS. “The IRS Encourages Taxpayers to Consider Charitable Contributions.”
IRS. “Charitable Contribution Deductions.”
IRS. “IRS provides tax inflation adjustments for tax year 2021.”
IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”
Tax Foundation. “2021 Tax Brackets.”
Tax Policy Center. “How did the TCJA change the standard deduction and itemized deductions?”
Source: https://www.thebalancemoney.com/why-you-didn-t-get-a-bigger-tax-refund-this-year-4588206
Leave a Reply