You could receive a nasty surprise in 2022 if you’re one of the 75% of Americans who receive tax refunds annually. It is possible that you will receive a smaller or nonexistent refund on April 15 or that you may owe the IRS money.
There are three reasons American taxpayers could owe money this tax season, according to Go Banking Rates:
- The advance Child Tax Credit.
- Paused student loan payments.
- Mutual fund distributions.
You’ll find out what the tax ramifications could be – and how you can prepare – if any of these financial situations relate to you in 2021.
Some Parents May Owe Money due to Advance CTC
Child tax credit for children under age 6 increased to $3,600, and for children aged 6-17, the CTC increased from $2,000 to $3,000 with the advance. Due to the monthly payments, although the total amount of the credit is higher, you could get less back at tax time despite the larger amount.
When you file, you’ll only receive a $1,500 credit, even if you previously received a $2,000 credit. You may have to pay back a significant amount of tax that you’d written off in previous years if you have more than one child. Those who are used to getting a tax refund of $2,000 or more have already received half of that amount as payments spread throughout last year.
Families whose income rose in 2021 could be worse off. Couples with adjusted gross incomes greater than $150,000 and single parents who make more than $75,000 could be required to return some of their advances CTC. For couples who made more than $170,000 or $95,000 for single parents, you will have to return all the credit.
The Interest on a Paused Student Loan Cannot be Deducted
In March 2020, nearly 90% of student loan borrowers took advantage of the option to stop making payments. The financial relief might have been temporary during the pandemic, but those who stopped paying may not have considered the tax implications of their actions.
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Interest can usually be deducted from gross income up to $2,500, even if you don’t itemize your tax deductions. Tax experts told CNBC.com that if you add an extra $2,500 to your AGI, you may have to pay an additional $500 or $600 in taxes.
Investors May Have to Pay More Taxes if Mutual Funds are Strong
Due to a bullish market, you might have received more capital gains distributions from your mutual funds than you have in the past. It is possible that you did not account for your extra capital gains income on your tax bill.
Since 2021 has already closed on the books, it’s too late to use tax-loss harvesting strategies or avoid capital gains tax by selling the fund. You should consult your tax accountant and financial advisor to determine what steps you need to take if investment growth continues in 2022.
Tax implications of unemployment benefits can also pose problems during tax time, so it is advisable to discuss them with an accountant as well.