You’re in the midst of filing your taxes before the tax deadline, or you already filed and you are fortunate enough to get a tax refund. But what if the amount of your IRS refund is less than you’re expecting or less than the refund you initially saw when you submitted your tax return if you already filed? Or maybe your refund for tax year 2021 was much higher than this year? You may be wondering why your tax refund is less than you expected.
There are a few reasons why your refund is less than expected this tax season:
- Tax benefits under the American Rescue Plan either reverted or went away for tax year 2022
- The IRS made adjustments due to differences in what is reported to them or adjustments to certain credits and deductions
- Your refund is offset as part of the Treasury Offset Program
- An adjustment for Federal taxes owed for a previous year
One of the key factors having an impact on tax refunds this tax season is the changes to tax provisions under the American Rescue Plan. Many tax credits under the American Rescue Plan, like the Child Tax Credit, Child and Dependent Tax Credit, and Earned Income Tax Credit, reverted to pre-American Rescue Plan provisions or were eliminated entirely.
Multiple IRS announcements warn that refunds may be smaller than expected for tax filers this season. If you were able to claim any of these tax benefits in 2021, you could see a difference in your refund when you file.
Read on for more details to help you understand why your refund may be different than expected, but know that you don’t need to remember all of this come tax time. For answers to this question and anything else related to your tax situation, TurboTax Live tax experts are available in English and Spanish, year round, and you can even get your taxes done in one meeting while a TurboTax Live Full Service expert prepares your taxes.
Changing Tax Benefits That Could Result in Lower Tax Refunds
In March 2021, the American Rescue Plan was signed into law and provided financial relief for millions of Americans. That relief came in the form of a round of third stimulus payments and expanded tax benefits and credits that families claimed on their 2021 taxes (the taxes filed in 2022). However, many of those tax benefits have reverted to Pre-American Rescue Plan provisions or have gone away and have resulted in many Americans receiving noticeably lower refund amounts.
Those benefits include:
- Child Tax Credit – Changed from up to $3,600 in tax year 2021 back to up to $2,000.
- Child and Dependent Care Credit – Changed from up to $8,000 for two or more kids (up to $4,000 for one child) in tax year 2021, back to up to $2,100 for two or more kids ($1,050 for one child).
- Earned Income Tax Credit with no kids – Expanded for filers with no kids and got rid of age limits in tax year 2021, but for tax year 2022 age limits return so you may not qualify if you are under 25 or over 65.
- Recovery Rebate Credit – Tax year 2021 was the final year you could claim the recovery rebate credit if you were eligible and did not receive the third stimulus sent in 2021.
- Self-Employed Sick and Family Leave Credits – The American Rescue Plan extended refundable tax credits for sick leave and family leave through tax year 2021 for both eligible self-employed and small business owners, but the credit expires after tax year 2021.
- Cash Charitable Donations – COVID Relief was extended through tax year 2021 and allowed you to deduct up to $300 in cash donations ($600 married filing jointly) on your 2021 taxes if you claimed the standard deduction, but you can no longer deduct contributions if you claim the standard deduction.
Adjustments to Your Refund After Filing
Other IRS Adjustments
While your tax return is being processed, the IRS cross-references the information on your tax return with the information they have on file for you. The IRS will correct any differences there may be. It is possible that amounts reported to the IRS from other sources and what’s reported on your tax return is different.
Some common errors that result in adjustments by the IRS include:
- Missed income, like small interest reported on a 1099-INT or a missing W-2
- Numbers that were transposed
- Adjustments to certain deductions or credits
Some of these mistakes occur when you wait until the last minute to file. However, another common issue that results in lowering a tax refund are adjustments to credits or deductions as a result of someone else claiming your dependent on their tax return. If you provide over half of the support for your dependent and you are eligible to claim them, make sure no one else is claiming them and you have accurate information for who you can claim as a dependent.
Always have a discussion with your child’s other parent (if possible) about who can claim them as a dependent if you are no longer together.
If the IRS adjusts your tax return, they will send you a notice CP12 regarding the adjustments they made.
Treasury Offset Adjustment
It’s possible that your tax refund may have been reduced by the Treasury Offset Program. The Treasury Offset Program oversees the collection of overdue bills owed to federal and state agencies. Different federal and state agencies, such as the Department of Education and child support, submit delinquent debts that need to be collected. These bills are then taken from tax refunds which lowers the tax refund amount deposited.
However, not all bills are subject to a tax offset. Bills from private lenders like a late car payment or missed cell phone bill will not reduce your tax refund.
Typically the IRS will mail you out a notice if your tax refund is different from the amount you claimed on your tax return. The notice will include information on the refund you were eligible for, the amount your tax refund was reduced by, what agency the money was sent to, and contact information for that agency.
Adjustment for Federal Taxes Owed for a Previous Year
Similar to reductions caused by the Treasury Offset Program, it is possible that your tax refund was reduced or eliminated based on federal taxes owed for a previous year.
If you owe taxes to the IRS from a previous tax year, those taxes will be reduced from any eligible tax refund for the current year. The IRS will actually take payments for owed federal taxes from a previous year before any other federal or state agency under the Treasury Offset Program.
If your refund is less than expected, you can check IRS Where’s My Refund, which will give you the most up to date information about your refund. The IRS will also send you a notice CP12 outlining why your refund was adjusted.
Ways to Save on Your Taxes Despite Tax Law Changes
If you still need to finish filing your taxes and see a lower refund due to tax provisions changing for tax year 2022, don’t worry. You still may be eligible for the existing tax benefits the way they were before the American Rescue Plan. There are also still other tax credits and deductions that will help increase your tax refund. About 90% of taxpayers are eligible for the standard deduction which was adjusted for inflation and is up to $12,950 single, $19,400 Head of Household, and $25,900 married filing jointly.
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