Many Taxpayers Could See Smaller Tax Refunds This Year

• Learn about changes to the child tax credit in 2022.
• Find information regarding changes to dependent care benefits in 2022.
• No recovery rebates in 2022 could mean smaller tax refunds for some.
• The federal government has ended the employee retention credit, reducing tax benefits for some employers.

Congress has for years used the tax return as a means of providing benefits to taxpayers in need and incentives to stimulate activities in business, as well as addressing environmental issues. So when COVID-19 hit, Congress and many state governments provided tax benefits to help citizens through the pandemic. Because the COVID pandemic-related benefits have come to an end, taxpayers may see smaller tax refunds this year, and substantially smaller for many. The following is a rundown of some areas where decreases in federal tax benefits will affect taxpayers’ 2022 tax refunds.

Child tax credit yields smaller tax refunds in 2022

• 2021 – Taxpayers with children enjoyed an enhanced and refundable tax credit of $3,000 per child under the age of 18 ($3,600 if under age 6) per child in 2021.
• 2022 – The credit has reverted to 2020 levels and the maximum credit for 2022 is $2,000 per qualifying child, of which the maximum refundable amount is $1,500 per child in certain situations. In addition, the credit only applies to children under the age of 17.

Non-refundable tax credits can only be used to offset tax liability and any excess is lost. On the other hand, a refundable credit offsets tax liability, and any excess is refundable.

In addition, the child tax credit has always phased out for higher-income taxpayers. For 2021 the phaseout thresholds were substantially increased. That increase in the phaseout threshold for the Child Tax Credit also applies to 2022. It is just the amount of the credit that is reduced from 2021.

No refundable dependent care benefits = smaller tax refunds

The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit equals a percentage of the dependent care expenses incurred. However, those expenses are limited to specific amounts and the taxpayer’s income from working. The credit percentage also declines for higher-income taxpayers.

2021 – The credit was fully refundable, and the credit was a flat 50% of the allowable expenses up to $8,000 for one and $16,000 for two or more qualified individuals. Thus the credit could be as much as $4,000 for one and $8,000 for two or more qualified individuals. The 50% credit rate began to phase out when the taxpayer’s AGI reached $125,000. However, the rate wasn’t reduced below 20%.

2022 – The credit is not refundable, and the credit rate ranges from a high of 35% to a low of 20% (see table) of the allowable expenses up to $3,000 for one and $6,000 for two or more qualified individuals.

No more recovery rebates

As a means of providing financial assistance to individuals during the COVID pandemic, Congress authorized Recovery Rebate Credits (also referred to as economic impact payments) for the 2020 and 2021 tax years.

• 2021 – The rebates, which generally were issued by the federal government during the year but which may have been claimed on the 2021 tax return, were:
  o $1,400 ($2,800 for joint filers)
  o $1,400 per dependent
• 2022 – There were no rebates

Employee retention credit is history

As the title implies, this is a credit whose purpose was to help employers retain employees on the payroll even though the employer’s business was in decline because of COVID.

• 2021 – The payroll credit was 70% of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups.
• 2022 – There is no longer a credit for years after 2021.

As you can see, there have been some significant reductions in tax benefits. These reductions can have a substantial impact on tax refunds for 2022. Have questions or would like to adjust your withholding to alter your refund for 2023? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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