Your Tax Refunds May Be Smaller This Year

With the expiration of more generous tax credits offered as pandemic relief, many taxpayers could see “significantly smaller” refunds this year, the Internal Revenue Service says. In some instances, taxpayers may owe money.

The federal government temporarily expanded several tax credits for 2021 to help support families during the depths of the Covid-19 pandemic. But Congress declined to make the changes permanent, so the credits reverted to prepandemic levels for 2022.

The child tax credit, available to working parents who meet certain income and other rules, provided as much as $3,600 per child in 2021. About 61 million children benefited, according to the Treasury Department. But for 2022, the credit returned to a maximum of $2,000 per child for eligible families. That means a family with three children may have received as much as $10,800 under the expansion, but would get at most $6,000 in 2022.

“That’s a big, noticeable difference,” said Melanie Lauridsen, director of tax practice and ethics for the American Institute of Certified Public Accountants.

For the earned-income tax credit, available to low- and moderate-income workers, a qualifying taxpayer with no children who received about $1,500 in 2021 would now receive $560, according to the I.R.S. And the child and dependent care credit, available to those who need care for family members while they work, returned to a maximum of $2,100, from $8,000 in 2021.

The changes could shrink refunds, or possibly result in a balance due in some cases.

Kathy Brown, president of the National Association of Enrolled Agents, a group for federally licensed tax preparers, said some taxpayers may be disappointed if they are expecting the same refund as last year.

Ms. Brown said she heard from a client who was eager to have her return processed so she could use her refund to take her child on a Disney vacation. Ms. Brown advised her to hold off on booking the trip, cautioning her that the refund “won’t be as large as it was last year.”

Some people who typically get small refunds or break even often file for an automatic filing extension, since they don’t feel a sense of urgency, Ms. Brown said. But this year, she said, filers shouldn’t assume they won’t have a tax bill. “They may not get a refund, and they may actually owe tax.” In that case, getting an extension may cost them interest and a late-payment penalty because an extension allows more time to file, but not to pay.

Taxpayers may also see reduced refunds this year because of the end of Covid relief stimulus payments, also known as economic impact payments. The third and final payment, of $1,400, went out to most eligible people automatically starting in March 2021. But those who didn’t receive it could claim it as a recovery rebate credit on their 2021 tax return, so it would reduce their tax bill or be included in their refund when they filed their return in 2022. But there were no stimulus payments last year, so no recovery rebate credit is available on 2022 returns, said Kathy Pickering, chief tax officer at H&R Block. “There have been a lot of changes, with the expiration of Covid relief programs,” she said.

Filers may want to have their returns prepared early in the filing season, so they can adjust their budget if their refund falls short of expectations. “Knowing where you stand lets you make appropriate decisions,” Ms. Pickering said.

If you do owe money, don’t panic, she said. You can file your return when the I.R.S. begins accepting them, but you don’t have to pay the tax until the filing deadline in April. That gives you about three months to save up the money. If you don’t have the full amount, you may qualify for a payment plan.

Also in 2022, some states with budget surpluses have been issuing tax rebates to residents. While there has been some confusion about whether such payments count as taxable income on 2022 federal returns, that is not the case, said Richard Auxier, senior policy associate at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

Other changes this year include the end of a tax break for charitable donations for people who don’t itemize, or detail, their various tax deductions. Last year, filers who chose the standard deduction — a flat amount that reduces taxable income — could claim a charitable deduction of up to $300 per filer. But now, only filers who itemize can deduct their charitable contributions. “That doesn’t exist in 2022,” said Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals.

At the same time, taxpayers are facing what will probably be another tax season with subpar customer service from the I.R.S. — this after enduring two seasons of pandemic-fueled disruptions at the agency.

The I.R.S. is “poised to start the 2023 filing season in a stronger position,” thanks to a reduced backlog of paper tax returns and newly expanded staff, according to a report to Congress this week from Erin M. Collins, the national taxpayer advocate. Ms. Collins heads a group within the Internal Revenue Service that works on behalf of taxpayers.

There is “light at the end of the tunnel,” Ms. Collins said in the report. But the new workers must be trained, taking experienced staff away from their main jobs and creating a “difficult balancing act” that will probably delay significant change until midyear, Ms. Collins said. That is well after the April federal tax filing deadline. “In the short run,” she said, “that may mean fewer employees are assisting taxpayers.”

Filers should “do everything they can” to file returns electronically, check returns for accuracy and arrange for direct deposit of refunds to avoid delays, Ms. Collins said in an interview. Last year, her report said, refunds for paper returns were delayed by six months or more.

The I.R.S. said in an announcement on Thursday that it expected taxpayers to experience improvements this tax season, and that most people who file electronically should get a refund within 21 days.

Here are some questions and answers about the tax filings season:

When does tax filing season officially begin?

The I.R.S. will begin accepting returns on Jan. 23.

When is the federal tax filing deadline this year?

Tax day this year for most filers is Tuesday, April 18, since the traditional April 15 deadline falls on a Saturday, and the following Monday is a holiday in Washington, D.C. Some filers, like those in federal disaster areas, including victims of the recent storms in California, will get extra time to file.

I sold a used item online last year. Will I get a form 1099-K?

A policy change would have required digital payment services like Venmo and PayPal to report transactions over $600 to the I.R.S., raising concern that casual online sellers would receive 1099-K forms reporting the sale, even if their transactions aren’t taxable. Because of a backlash from lawmakers and an uproar from small-business owners, the agency postponed the change until next year. (The rule still applies, but just to sellers with more than 200 transactions totaling over $20,000.) If you get a 1099-K, Mr. O’Saben said, “Don’t ignore it.” Try to determine why you received it, he said, and consider consulting a tax professional to help decide if you should report the amount as income.