Many Taxpayers Will See Smaller Refunds This Year 

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, your tax refunds may be smaller 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: 

  • 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 as illustrated in the table. However, that increase was for 2021 only and the thresholds have reverted to 2020 levels for 2022. 

CHILD & DEPENDENT TAX CREDITS PHASEOUT THRESHOLDS 

Filing Status 

2022 

2021 

Married joint 

$110,000 

$400,000 

Married separate 

$55,000 

$200,000 

All others 

$75,000 

$200,000 

Dependent Care Benefits: The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit is a percentage of the dependent care expenses incurred, but 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 $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, but 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. 

 

AGI Adjusted Applicable Percentage (Other Than 2021) 

AGI 
Over 

But Not 
Over 

Applicable 
Percent 

AGI 
Over 

But Not 
Over 

Applicable 
Percent 

0 

15,000 

35 

29,000 

31,000 

27 

15,000 

17,000 

34 

31,000 

33,000 

26 

17,000 

19,000 

33 

33,000 

35,000 

25 

19,000 

21,000 

32 

35,000 

37,000 

24 

21,000 

23,000 

31 

37,000 

39,000 

23 

23,000 

25,000 

30 

39,000 

41,000 

22 

25,000 

27,000 

29 

41,000 

43,000 

21 

27,000 

29,000 

28 

43,000 

No Limit 

20 

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 – As the title implies, this is a credit whose purpose was to help employers retain employees on 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 of tax benefits that can have a substantial impact on your refund for 2022. Please contact this office if you have questions or would like to adjust your withholding to alter your refund for 2023.