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Will tax refunds be lower this year for Americans?

Changes to tax rules over the past year could have consequences for your tax bill and a majority of Americans expect their refund to be lower than last year.

Changes to tax rules over the past year could have consequences for your tax bill and a majority of Americans expect their refund to be lower than last year.

If you’re used to receiving a tax refund from the IRS around this time each year, financial experts warn that you may get less than usual this year. Millions of Americans could receive a smaller refund in 2022, or even face the prospect of owing money to the IRS.

A YouGov/Forbes Advisor poll of 1,200 Americans found that more than half of respondents expect their tax refunds to be lower this year. Furthermore only 42% of those with a household income of less than $50,000 (considered a low-income household) anticipate getting a refund at all.

Receiving a federal tax refund typically means that you have overpaid on your taxes over the previous year, or you’ve withheld more than you owe, based on your actual taxable income. However there are some changes to tax rules in recent years that could see your refund significantly reduced.

Changes to the Child Tax Credit

Last year the American Rescue Plan brought about a major change to the Child Tax Credit, which was first introduced during the Clinton administration. The change upped the top amount on offer from $2,000 to $3,000, or $3,600 for children aged below six.

The one-year change also made the support fully refundable, which meant that more low-income families could receive all of the money. But the most significant change was to the payment structure, with monthly direct payments sent out to eligible families for the final six months of 2021.

This meant that half of the entire annual credit was sent out last year and means that only $1,500 for older children will be available to claim as a tax credit when you file your taxes. This is $500 less than in previous years and could be costly for families for multiple children.

Student loan repayments delayed due to the pandemic

At the outset of the pandemic in March 2020 the Department of Education allowed millions of Americans to pause their monthly student loan payments. It was an offer that around 90% of borrowers gladly accepted and the loan relief continued throughout 2021.

However while this helped many get through the pandemic, it does mean that borrowers will be unable to claim the write-off for student loan interest that was available in previous loans.

Patrick Amey, advisor at Financial Advisory Service in Kansas, explains the value of this write-off: “It could be $500 or $600 at the end of the day, in real money, after that adjustment.”

Mutual fund investors may have a higher tax bill

As mentioned, tax refunds are issued when the filer has paid more tax or withheld more income than they are required to pay. This means that an unexpected hike in your tax bill could see your refund reduced or wiped out entirely.

According to CNBC, many actively managed mutual fund accounts had a good year in 2021, meaning that they run the risk of triggering extra taxes that the recipients may not have been expecting. This will be less than the funds accrued by the investor over the year but being forced to pay up at filing time can come as a surprise.