The IRS has advised that many people should expect smaller tax refunds for 2022. Here’s why your refund may not be as big as last year’s and some tips on what you can do to maximize your refund amount.
Why do you get a tax refund from the IRS?
Let’s review why we get a tax refund in the first place. What impacts the amount you receive when you file?
For many people, your tax refund is exactly what it sounds like — a refund of taxes that you overpaid during the tax year. This can be due to withholding more tax than you owe from your regular paychecks or overestimating your self-employment taxes.
Qualifying for a refundable tax credit may also contribute to your refund amount. When a refundable credit amount exceeds the tax you owe, you receive the leftover credit as a refund. For example, if you owe $400 in taxes and qualify for a $1,000 credit, you’ll receive the remaining $600 as a refund.
Why you might get a smaller tax refund for 2022
Reason 1: Expiring pandemic relief measures like the Child Tax Credit and more
This is the number one reason you may receive a smaller refund this tax season.
Due to the pandemic, many tax credits were expanded for tax year 2021, increasing credit amounts and making some credits refundable that previously weren’t. However, most of these enhancements expired in 2022, making some credits less valuable than the previous year.
We’ve put together a table comparing specific tax credit amounts altered by COVID-19 relief measures and how they have changed for 2022:
Child Tax Credit (CTC)
Maximum credit amount $3,000-$3,600 depending on child’s age
Maximum credit amount $2,000 regardless of child’s age (must be under 17)
Up to $1,500 refundable
Available to claim as the Recovery Rebate Credit on your tax return
No Recovery Rebate Credit since no stimulus payments occurred in 2022
Earned Income Tax Credit (EITC)
Maximum credit amount for childless taxpayers was $1,502
Maximum credit amount for childless taxpayers is $560
Child and Dependent Care Credit
Maximum amount of qualified expenses you’re allowed to claim was $4,000 for one qualifying child or $8,000 for two or more qualifying children
Refundable to qualifying taxpayers
Maximum amount of qualified expenses you’re allowed to claim is $3,000 for one qualifying child or $6,000 for two or more qualifying children
No longer refundable
$300-$600 deduction available to those who claimed the standard deduction (deducting more contributions required itemizing)
Donations deductible up to 100 percent of your adjusted gross income
Only available if you itemize your deductions
Deductible donations once again limited to 60 percent of your adjusted gross income
If you claimed one or more of the tax breaks listed above, you could see a significant decrease in your refund this year.
Reason 2: The current economic environment
Another factor that could affect your refund amount? The economy.
Here are some factors to consider:
Inflation – The IRS adjusts many figures for inflation annually, such as expanding the income ranges for each tax bracket. However, not all tax breaks account for inflation. A big one that may affect you this year is the capital loss deduction, which allows investors with net losses to lower their taxable income by up to $3,000 per tax year. This amount remains unchanged from the previous year, despite rising prices.
Layoffs – If you were laid off in 2022 and received a severance payment, it could affect your taxes. Severance payments are taxable, so receiving one could bump you into a higher tax bracket.
The stock market – If you were forced to sell off investments last year to cover expenses, you might have to pay capital gains taxes which can increase your tax liability (if you happened to sell the asset for a profit).
The above may have less of an impact on your tax refund, depending on your situation, but it’s still good to keep these factors in mind.
Tips to help you maximize your 2022 tax refund
So, what can you do to ensure you aren’t caught off guard with a significantly smaller refund or even an unexpected tax bill this year? Keep the following tips in mind as you file this season.
1. Know what tax credits you qualify for
Make sure you know what tax breaks are available to you and how much each is worth this tax season.
Besides expiring pandemic relief measures, some new tax breaks are available this year — certain states are offering tax rebates or relief. Some states have even expanded their existing EITC and CTC programs or created new ones.
There have also been changes to some existing tax credits this year, such as the credit for purchasing certain electric vehicles.
If you e-file with TaxAct®, we can help you in this area — our interview questions are designed to pinpoint precisely what tax benefits you may qualify for, and we’ll help you fill out the necessary paperwork to claim them.
2. File your tax return early
Filing as early as possible helps in two ways: you’ll get your refund faster and have more time to prepare for and pay your tax bill if you owe taxes.
If you e-file, you should get your tax refund within 21 days. If you end up owing taxes, you have until the filing deadline, April 18 this year, to pay any taxes due. That’s why filing early can be beneficial if you end up with an unexpected tax bill — it gives you more time to plan for and pay the cost.
3. Contribute to a retirement account or health savings account
Another way to reduce your taxable income is to contribute to an individual retirement account (IRA) or health savings account (HSA).
Traditional IRA contributions may be deductible depending on your modified adjusted gross income (MAGI). You can contribute up to $6,000 for 2022, potentially reducing your gross income by that amount.
Don’t forget to max out your HSA contributions as well. In 2022 you can contribute up to $3,650 for a single plan and up to $7,300 for a family plan.
You have until Tax Day, April 18, to make IRA or HSA contributions for tax year 2022.
4. Use crypto and stock losses to your advantage
If you sold cryptocurrency or other investments at a loss last year, you could use your losses to offset any gains you might have had. If you have no gains to offset, you can deduct up to $3,000 in losses to reduce your taxable income.
5. Use our Refund Booster to prepare for next year
While you may not be able to change your tax situation this year, set yourself up for success next year by taking advantage of our Refund Booster1.
Form W-4 underwent modifications beginning in tax year 2020. The changes were intended to help you “break even” on your taxes — meaning you’d end up with a tax liability as close to zero as possible.
Refund Booster can help you fill out your Form W-4 to get a bigger refund at tax time or put more of that refund money into your paycheck throughout the year. Either way, you’re in control.
Know what to expect from your refund
Don’t be caught off guard by a smaller tax refund this year. Expiring pandemic relief measures and the economy’s state could drastically alter your refund amount compared to 2021, so keep these factors in mind when planning for your refund this season.
Most importantly, don’t expect your refund to look the same as last year, especially if you claimed credits like the Child Tax Credit or wrote off charitable contributions. To maximize your 2022 tax refund, try contributing to an IRA or HSA or using capital losses to lower your taxable income.
And don’t forget to file early — this gives you more time to prepare for any potential tax bills on the horizon.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.
1Refund Booster may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.
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