Tax Season

3 reasons why your tax return might be smaller this year
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3 Reasons Why Your Tax Refund Might Be Smaller This Year

It’s pretty simple, really.

by Caroline Farhat

Preparing and filing your taxes may not feel like such a chore if you are anticipating a refund. But if you were planning to use those funds to pay down debt or to pad your emergency fund, you might need to adjust your plans. After filing, you may be left wondering, why is your tax refund so low this year? It’s definitely smaller than you anticipated. Some tax changes that were implemented in 2021 may cause your refund to be lower than previous years.

40% of U.S. adults anticipate receiving a refund this year according to a survey conducted by Bankrate. If those numbers are different from what you’re used to (and you haven’t experienced any major life changes like a pay increase or change in dependent status), here are three reasons your tax refund may be lower this year.

1. Advance child tax credit payments

If you claim dependents on your taxes, one of the main reasons your tax refund is smaller this year might be due to the advance child tax credit payments. The child tax credit in years prior to 2021 was claimed on your tax refund with the full credit being provided for in your refund. The difference in 2021 was the American Rescue Plan provided for advance monthly payments on half of the credit, unless you opted out of the monthly payments. Monthly payments were disbursed July through December 2021 and were based on information from your 2020 or 2019 tax returns. If you received the monthly payments this means there is only half of the credit to claim on your tax return, possibly causing a smaller tax refund than previous years.

2. Pause in student loan payments

Federal student loan payments have been paused since March 13, 2020. Many student loan borrowers have taken advantage of this relief including through all of 2021. Although this may have come as welcome relief during the pandemic to reduce your expenses, it can potentially lower your tax refund. Since payments are not being made, no interest is being paid on student loans. Student loan interest can be taken as a deduction on tax refunds that can reduce your taxable income up to $2,500, thereby causing less taxes to be owed. With no deduction to reduce your income, more taxes will be owed which may result in a smaller tax refund than years when you were paying student loan payments.

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3. Taxable unemployment benefits

If you or your spouse received unemployment benefits in 2021 this could cause your tax refund to be lower than expected. The reason for this is benefits received in 2020 were not taxable up to $10,200. But for benefits received in 2021 federal income taxes are owed on the entire amount received. If you didn’t voluntarily withhold income taxes or didn’t pay enough taxes this could reduce your refund to cover the taxes owed on the unemployment benefits.

If your tax refund is smaller this year, know that it could be temporary as a result of the tax changes that took place just for 2021.