There are myriad factors that affect the size of your tax refund— that is, if you get one at all. Not only does your income play a role in your annual tax bill and thus your refund, but the amount you have withheld from your paycheck (or how much you sent in quarterly taxes) matters just as much.
Then there are deductions and credits that may apply one year and not the next. If you\’re in the midst of a big life transition (i.e. you had a child this year or you lost your job, resulting in a major loss in income), it\’s possible your tax refund could look a lot different when you get your tax refund in early 2022.
Of course, there are some tax situations you can\’t possibly plan for, as well as others that are determined by the federal government, your state, or the Internal Revenue Service (IRS). With that in mind, there are two major factors that could leave you with a much smaller tax refund next year. While they won\’t apply to everyone, these factors can impact your tax refund dramatically if you have federal student loans, children, or both.
Advance Child Tax Credit Payments
In order to provide a boost to the economy in light of the ongoing pandemic, the Biden administration instituted advance child tax credit payments to eligible families in 2021. These advance credits essentially allowed families to receive half of their normal child tax credit as an advanced cash payment on a monthly schedule through the end of 2021. Families have been instructed to claim the other half of their child tax credit when they file their 2021 income tax return in 2022.
In the meantime, the American Rescue Plan increased the Child Tax Credit from $2,000 per child to $3,000 per child for kids ages 6 and older and from $2,000 to $3,600 for children under the age of six. The age limit for the credit was also raised from 16 to 17.
This means many families with kids have received a check of up to $300 for each of their eligible dependents in July, August, September, October, and November so far. The final installment of the advance child tax credit payment will be sent to eligible families on December 15, 2021.
These payments have provided a much-needed boost for millions of working parents, but many may not realize they will now receive half of the child tax credit they were going to receive when they file their 2021 income tax returns.
Ultimately, this could lead to some families receiving a smaller refund than expected, or perhaps even facing a tax bill when they file their taxes next year.
For full disclosure, it was possible to \opt out\ of the advance child tax credits earlier this year, but many people couldn\’t seem to figure out how to do it. With that in mind, there were certainly some families who received these advance payments this year who didn\’t need them or want them.
If you have children and you haven\’t been receiving these payments, it\’s likely you didn\’t qualify. According to Whitehouse.gov, the income cap for families to receive the full advance credit was set at $150,000 for a couple or $112,500 for a family with a single parent.
No Federal Student Loan Interest In 2021
Another reason you could see a lower tax refund could come into play if you have federal student loans. As you probably know, the federal government halted payments and set federal student loan interest at 0% starting in March of 2020. This benefit has been extended several times throughout the pandemic, although the deferment period is currently set to expire on January 31, 2022.
By and large, this means borrowers with federal student loans didn\’t pay a dime in interest in 2021. This also means borrowers who took a deduction on their taxes for student loans in the past won\’t get that benefit this year.
How much is the student loan interest deduction normally worth? According to the Internal Revenue Service (IRS), you can deduct a maximum of $2,500 of interest you actually paid within a year on your federal taxes. However, this deduction is automatically phased out and eventually eliminated based on your modified adjusted gross income (MAGI) and how it compares to annual limits for your filing status.
If you\’re single, a qualifying widow(er), or head of household, phase-outs start once you reach a MAGI of $70,000 and the student loan interest deduction becomes unavailable once your MAGI reaches $85,000. For married couples, the deduction phase-out starts at $140,000 and ends entirely once your MAGI reaches $170,000.
Collection Activity Could Resume In 2022
It\’s also worth mentioning that tax refund offsets for student loans are set to resume on February 1, 2022.
This means that, if you\’re sufficiently in default on your federal student loans, the government can retain your tax refund in order to help repay your debt.
There have been several proposals to delay the start of collection activity at least 90 days to give borrowers a chance to get their loans out of default, but as of now, none of those have gone into effect.
With that in mind, early filers who are in default on their student loans could see their tax refunds garnished.
The Bottom Line
If you are worried about getting a smaller tax refund or owing money when you file your taxes next year, there are several ways you could remedy the situation. However, your next best steps really depend on your unique circumstances, and you may want to speak with a financial advisor or tax professional before you make any big moves.
With that being said, you can always look for additional ways to lower your taxable income if you want to boost next year\’s refund. This could mean contributing to a Health Savings Account (HSA) if you\’re eligible to use one, quickly moving more money into a tax-advantaged retirement account you have access to, making some strategic charitable contributions, or digging deep to find additional tax credits or deductions you may be eligible for.
But really, you shouldn\’t care too much about how much you get back after you file your taxes each year. At the end of the day, it\’s important to remember that your tax refund is nothing more than an over-payment you made to the government over the course of any given year.
In other words, your tax refund is your money and not a gift from the government, even if it feels that way.