Several states and the IRS implemented tax breaks and rebates to help people with pandemic hardships and the rising cost of living over the past couple of years.
Since these programs designed to assist middle to low-income households will no longer be available when filing 2022 tax returns, here are some reasons why some tax refunds could be much smaller in 2023.
Child Tax Credit Returns to Pre-Pandemic Amount
The child tax credit (CTC) was temporarily increased in 2021, allowing for more qualifying dependents and providing for advance payments. However, this will be different for your 2022 tax return.
Once again, the CTC is only available to children under 17, and the amount has decreased to the pre-pandemic level of $2,000 per child or dependent. While still available, the child tax credit is only partially refundable to some low-income parents, and advance payments are no longer available. However, if you are qualified, you should still apply for the CTC because it may increase your refund or reduce your tax bill.
Fewer Qualify for Child Care and Dependent Tax Credit
Temporary increases to the Child and Dependent Tax Credit in 2021 allowed households with incomes of $125,000 or less to deduct 20% to 50% of $4,000 (or $8,000 for parents with multiple children) in childcare costs.
This tax benefit is returning to its 2020 levels for 2022. One-child households can now only deduct 35% of up to $3,000 in allowable expenses or up to $1,050. If you have more than one kid, you might get up to $2,100 if you meet the requirements. That is 35% of up to $6,000 in qualified expenses.
The main distinction is the required minimum annual household income. The 2022 income level for receiving this credit is $15,000, a significant decrease from the 2021 requirement of $125,000.
Harder to Qualify for Earned Income Tax Credit Without Kids
More Americans were qualified to receive the Earned Income Tax Credit (EITC) on their 2021 tax returns last year. The EITC is reverting to pre-pandemic levels this year.
If you do not have any children or dependents, the maximum EITC you can receive in 2022 is $560, a reduction of $942 from the previous year’s maximum of $1,502. Age limits have also been reset to their original range of 25 to 65 years old.
Better IRS Tracking for Taxable Crypto and NFT Transactions
In 2022, the IRS has put more effort into monitoring cryptocurrency and other digital asset transactions, like NFTs. A taxable transaction occurs whenever you buy, sell, or trade. Now, cryptocurrency is treated like property for tax purposes and is therefore subject to either short or long-term capital gains taxes.
Any cryptocurrency losses can be reported with the gains. Since the value of Bitcoin and Ethereum plummeted in 2022, investors who sold or exchanged their cryptocurrency holdings at a loss may be entitled to deduct some or all of that loss from their taxable income. This also applies to NFTs.
1099-K for PayPal, Venmo, and Other Payment Apps
Those who have been self-employed for some time probably know they must declare 1099 income to the IRS. Because of the new requirement that third-party payment apps report your payment activity, the IRS will have even more direct access to your income this year.
You will still have to file taxes, but the IRS can check those numbers against the transactions provided by the payment apps. Thus, they will know if there is any discrepancy. Platforms such as Venmo, PayPal, Zelle, Cash App, and others will issue 1099-K forms to users who must report 1099 income from payment apps.
Smaller Tax Break for Non-Itemized Charitable Cash Contributions
Tax deductions for donations to charity may be more challenging to obtain this year. Benefits for increased cash contributions to charity, which were available in 2020 and 2021, are no longer available. In 2020 and 2021, the 60% AGI restriction that was temporarily lifted is back, putting a cap on the amount that can be claimed in charitable contributions.
Some States Will Tax Student Loan Forgiveness
Although federal student loan forgiveness is on hold for the foreseeable future, you may have been eligible for loan cancellation under the Public Service Loan Forgiveness program or a similar initiative. Federal income taxes do not need to be paid on canceled debt balances if they occurred in 2022. This is due to a clause in the American Rescue Plan of 2021 that exempts forgiven federal student debts from taxation until 2025.
However, a few states may levy taxes on forgiven debt balances. Four states—Indiana, Minnesota, Mississippi, and North Carolina—have indicated that they will assess taxes on any student loan debt relief in 2022. Details are still being worked out, but a few other states may join.
Dealing with IRS taxes can be a daunting task. If you need help, schedule a free call with us or start with a free evaluation.
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