Why is my tax refund $1500 less?

freep.com - Some tax filers shocked by smaller than expected refunds

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Did you hope that your tax refund might pay for a trip to Disney World? But maybe you've discovered the ugly truth that your refund will only take you as far as Toledo?

Frankly, given the dramatic spike in gas prices — now around $4.25 a gallon at some stations in metro Detroit in early March — even a small refund won't take you as far as it did back in February.

A long list of reasons could be contributing to why less refund money is showing up for many tax filers. First, did you make more money last year than you remember?

In many cases, we're paying more in taxes because we worked more hours, got better jobs and saw better gains on our investments that aren't in tax-deferred retirement accounts than we did at the start of the COVID-19 pandemic in 2020. If you got a raise last year, for example, you might be pushed into a higher tax bracket. After the robust rally on Wall Street last year, some investors are shocked by taxable events that didn't put more cash in wallets — such as taxable capital gains distributions from mutual funds not in a 401(k) or IRA. The good news: Tax refunds on average are up so far through late February for early filers. Some people are getting more money. The Internal Revenue Service issued 29.7 million tax refunds through Feb. 25 with the average refund hitting $3,473. That's up 15% from the same time a year ago when the average was $3,021. Comparisons are hard to make, though, because the IRS started processing returns Feb. 12 last year but processing began Jan. 24 this year. About 11.2% more returns were processed through Feb. 25 when comparing with data for the same time last year. Some new tax breaks helped some early filers, including lower income working households with no children. In 2021, for example, the maximum Earned Income Tax Credit for those without qualifying children is $1,502, up from $538 in 2020. Even so, tax professionals say many clients continue to be shocked by smaller than expected tax refunds.

A long list of reasons cut into refunds

James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, said a variety of situations can come into play to trigger a smaller refund for someone's 2021 tax return than their 2022 return.

They include:

Many people went back to work last year after the short, but deep recession in 2020. Many who are back working are seeing higher wages, which even could put them in a higher tax bracket than prior year. The stock market performed well and many mutual funds paid out larger than normal capital gains and income distributions if the investor held the fund in a taxable account. This is income that people don't see in their bank accounts. Unemployment compensation is taxable in 2021 and you could end up paying taxes on jobless benefits now. Last tax season, millions of people benefited from a temporary tax break that excluded a limited amount of unemployment compensation for those who qualified on 2020 returns. The advance child tax credit put money into wallets in 2021. Now, many people don't realize the money was an "advance" of an expanded credit for 2021.

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Some taxpayers aren't seeing an interest deduction for student interest for federal student loans because they didn't make any payments in 2021. (If you paid more than $600 in interest in 2021, you will automatically receive form 1098-E in the mail or by email.)

What's missing for student loans?

When it comes to student loans, many borrowers often can get some tax relief through the student loan interest deduction. But if you took advantage of the pandemic-related payment pause and didn't make student loan payments in 2021, you can't deduct interest. Borrowers are able to deduct the amount of interest paid in 2021 on a qualified student loan. You can reduce your income that's subject to tax by up to $2,500 in interest if you meet certain income limits. For 2021, the amount of your student loan interest deduction is gradually phased out if your modified adjust gross income is between $70,000 and $85,000 if single and $140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your modified adjusted gross income is $85,000 or more and $170,000 or more if you file a joint return. Also you cannot deduct as interest on a student loan any interest paid by your employer after March 27, 2000, and before January 1, 2026, under an educational assistance program.

Does getting unemployment affect my tax return?

As for jobless benefits, some social media buzz has been implying that the IRS is taking away money from people who received unemployment benefits. For many, what's happening is that temporary tax breaks for 2020 on unemployment compensation are no longer available on 2021 tax returns. As part of the American Rescue Plan, many taxpayers were not required to pay taxes on up to $10,200 in unemployment benefits received in 2020. The exclusion was up to $10,200 of jobless benefits for each spouse for married couples.

Not everyone was covered by that temporary 2020 break.

The special provision to waive taxes on some unemployment income applied only to those who made less than $150,000 in adjusted gross income in 2020. What's confusing now: The tax break on jobless benefits — which also extends to many state income tax returns, including Michigan — only applied to 2020, not 2021. Many people who are financially strapped when they lose a job often do not have taxes withheld. They could owe taxes when they file their 2021 income tax returns.

How much do you get per child in 2021?

When it comes to the child tax credit, the tax credit itself is vastly improved for 2021. Many parents benefited because the dollar amount of the credit was expanded significantly. At the same time, though, a huge chunk of that money was received in advance in monthly payments from July through December last year. "Most of the people that I'm seeing are getting slightly lower refunds, but it's mainly due to the advance child tax payments received," said Antonio Brown, a CPA in Flint and member of the Michigan Board of Accountancy. The child tax credit is worth up to $3,600 for each qualifying child age 5 or younger; and up to $3,000 for children from age 6 through 17 for the 2021 tax year.

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But that doesn't mean you're going to be getting $3,600 now for each child when you file a 2021 federal income tax return if you received advance payments last year. "If the taxpayer received half of the full tax credit in advance, that means the rest of the credit will appear on the tax return as a $1,500 or $1,800 refundable tax credit," Brown said. While that amount is good, it's smaller than the maximum $2,000 credit that many families received on the 2020 return. Brown said he's still only seen less than half of his clients this year so it is hard to say how much smaller some refunds might be. But in some cases, his clients are seeing income tax refunds that are about 19% or so smaller compared with last year. "I have to remind the client that they received half of the credit in advance, so actually, in most scenarios, they came out better," Brown said.

More:Why some tax refunds fall short of what some families expected

More:New rules for 2021 taxes may mean bigger refund for young workers, retirees with side jobs

More:Don't forget: Jobless benefits are taxable on 2021 tax returns

One benefit for many lower income households: On the 2021 federal income tax return, the child tax credit is fully refundable unlike in 2020 when it was only partially refundable. As a result, some could be receiving more money. For the 2020 tax year, for example, the maximum refundable portion of the child tax credit was $1,400. On the 2021 return, low wage earners receive the full value of the credit even if they owe little or nothing for federal income taxes. So they're getting a bigger tax benefit when it's fully refundable. You do not need any income or need to owe any tax in 2021 to receive the full amount of the child tax credit for which you are eligible. The child tax credit also was expanded to include children age 17 in 2021. Prior to that, the cutoff was age 16.

Do you owe some money?

Your federal income tax refund could be smaller because of some past debt that's owed. The Treasury Offset Program is able to immediately reduce your tax refund for specific past-due debts, including past due state income taxes and child support. In FY 2021, the Bureau of the Fiscal Service collected $4.1 billion from 3,491,938 offsets of federal income tax refunds. ContactSusan Tompor: stompor@freepress.com. Follow her on Twitter@tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

freep.com - Some tax filers shocked by smaller than expected refunds

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