Stimulus Update: Why Your Tax Refund Could Be Smaller Because of Last Year's Stimulus Payments
- The deadline for filing taxes is coming up very soon.
- Many Americans could find they get smaller refunds or even owe money.
- This could occur as a result of last year's stimulus relief.
Don't get caught off guard by a smaller-than-expected refund.
The April tax deadline is fast approaching, which means millions of Americans will soon submit their tax returns if they haven't already. When filing a return, many families may be surprised to discover that they are getting a smaller refund than they did in years past -- or even that they owe money this year despite the fact they usually get some cash back.
If this happens to you, it may very well be because of a particular type of stimulus payment you received in 2021. Here's what you need to know.
Will your 2021 stimulus payments lead to less money back from the IRS?
There's a simple reason why stimulus payments could affect tax refunds this year. It's because one of the key forms of COVID-19 relief was actually an advance on a tax credit that many people normally claim when filing their taxes.
See, the American Rescue Plan Act changed the existing Child Tax Credit. The Child Tax Credit was previously available to parents and provided $2,000 per child, up to $1,400 of which was refundable. However, claiming this credit required parents to submit a tax return. In other words, they got their money when they filed their tax forms in April.
The American Rescue Plan Act made the Child Tax Credit bigger. It provided $3,000 per child aged 6 to 17 or $3,600 for kids under the age of 6. It also arranged for half of the amount of the credit to be delivered up front on a monthly basis from July to December. Families who were eligible received either $250 or $300 per month during these months -- thus getting between $1,500 to $1,800 of their credit up front.
Since many parents received payments for a good portion of their credit during the year, they may have less money to write off when filing their tax returns than they normally do. If you're eligible for a $3,000 credit and got $1,500 of it up front, you'd only be able to claim another $1,500 credit at tax time. If you were used to claiming a $2,000 credit, your tax bill could be $500 higher.
Some people could find themselves in an even worse situation. That's because there was an income limit on the expanded credit. It began phasing out at $75,000 for single filers and $150,000 for joint filers. And the IRS relied on older data from past tax returns to determine eligibility. Some people who earned more in 2021 may not have been eligible for the expanded credit but may have received the monthly payments anyway.
If you weren't eligible for the expanded credit, you'd likely still have remained eligible for the standard $2,000 credit. However, if you received $1,800 in upfront payments, you'd only get to claim a $200 credit instead of a $2,000 credit that you normally get. Your tax bill could be a lot higher as a result.
It's important to be prepared for this possibility, as you may find that you don't get back the money you planned or even have to write a check to the IRS this year.
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