Stimulus Update: Why Could Your Tax Refund Be Reduced Due to Last Year’s Stimulus Payments?

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The April tax deadline approaches quickly, which means that millions of Americans will soon file their tax returns if they haven’t already. Many families may be surprised to learn that they are receiving a smaller refund than in previous years – or even that they owe money this year, despite the fact that they typically receive some cash back.

If this occurs in your case, it could very well be as a result of a specific type of stimulus payment you received in 2021. What you need to know is as follows.

 

Will your 2021 stimulus payments result in you receiving less money from the IRS?

There is a straightforward reason why stimulus payments may have an impact on tax refunds this year. This is because one of the primary forms of COVID-19 relief was an advance on a tax credit that many people typically claim when they file their taxes.

As an example, the American Rescue Plan Act altered the previously established Child Tax Credit. Previously, parents were eligible for the Child Tax Credit, which provided $2,000 per child, up to $1,400 of which was refundable. However, parents were required to file a tax return in order to claim this credit. In other words, they received their funds in April when they filed their tax returns.

 

Tax Refunds

 

The American Rescue Plan Act increased the size of the Child Tax Credit. It provided $3,000 for children aged six to seventeen and $3,600 for children under the age of six. Additionally, it arranged for half of the credit to be paid in advance on a monthly basis from July to December. During these months, eligible families received either $250 or $300 per month, netting them between $1,500 and $1,800 of their credit up front.

Due to the fact that many parents received payments for a significant portion of their credit during the year, they may have less money to deduct on their tax returns than they normally do. If you qualify for a $3,000 credit and receive $1,500 in advance, you can claim an additional $1,500 credit at tax time. If you are accustomed to claiming a $2,000 credit, your tax bill may be increased by $500.

Certain individuals may find themselves in an even worse situation. That is because the expanded credit had an income ceiling. It phased out at a threshold of $75,000 for single filers and $150,000 for joint filers. Additionally, the IRS determined eligibility based on older data from prior tax returns. Certain individuals who earned more in 2021 may have been ineligible for the expanded credit but received monthly payments regardless.

If you were not eligible for the expanded credit, you would almost certainly have retained your standard $2,000 credit. However, if you receive $1,800 in upfront payments, you will receive a $200 credit rather than the normal $2,000 credit. As a result, your tax bill could be significantly higher.

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A Guide to Spousal, Ex-spouse, and Widow’s Benefits Under Social Security.

It’s critical to be prepared for this possibility, as you may find that you do not receive the money you anticipated or may even be required to write an IRS check this year.

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