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5 reasons your tax refund this year might be smaller

Tax refund check

The 2022 tax filing season is off to a strong start.

In its first two weeks, from Jan. 24 to Feb. 4, the Internal Revenue Service received almost 16.7 million returns, and processed almost 13 million of them.

The most important statistic for these millions of early filers is the refund numbers. Drum roll, please. So far, the IRS distributed more than 4.3 million refunds. The average refund very early this tax season is $2,201.

That's the early average. Yours might be more. Or it might be less. In fact, many folks this filing season might find their refunds are much less than they expected.

Here are five reasons why your tax refund might be smaller.

1. You got half your Child Tax Credit money last year. The Child Tax Credit (CTC) amount for 2021 was larger than in prior years, or than it will be in 2022 or beyond, unless Congress acts. It was $3,600 for each child younger than age 6 and $3,000 for children ages 6 to 17. But that increase over the usual $2,000 per child doesn't necessarily mean the tax credit will produce a larger refund at filing time.

That's because many folks, actually around 36 million families, got half of their eligible CTC amounts last year. It was delivered by the IRS as advance monthly payments from July through December 2021. If you're in this group, when you claim the remaining half of your CTC on your return as the Recovery Rebate Credit, you'll only get to collect $1,800 for each of your younger-than-6 kiddos or $1,500 for your older dependent children.

2. You collected unemployment. Although the economy picked up last year when the COVID-19 pandemic eased a bit, at least in some areas, plenty of folks were still out of work. If you were one of them and your job loss was not your choice, you might have qualified for unemployment benefits.

All of that government-provided financial help to tide you over is fully taxable on your current return. The law that made $10,200 of unemployment tax-free in 2020 was not extended into 2021. If you didn't have taxes withheld from your unemployment benefits or make enough in estimated tax payments to cover what you owe Uncle Sam, taxes due on your unemployment earnings will cut into any expected refund.

3. You took on gig work. You, like many folks who lost salaried jobs due to coronavirus, made ends meet by taking gig jobs. As a self-employed individual, you should have made estimated tax payments to cover what you made from the jobs. If you didn't, you'll owe tax when your file. That will reduce any refund you might otherwise have received. It also could mean you owe more because you didn't pay your 2021 estimated taxes in a timely manner.

4. Your investments paid off nicely. Investments, from the standards like stocks and bonds to newer assets like cryptocurrencies, did quite well in 2021. The S&P 500 gained 26.9 percent, the Dow Jones Industrial Average (DJIA) gained 18.7 percent, and the NASDAQ Composite gained 21.4 percent. Bitcoin and other digital currencies also boomed.

If you took advantage and sold any of your assets at a profit, you'll owe tax, either at ordinary short-term rates (which could be as high as 37 percent) or at lower long-term capital gains tax rates that typically are 15 percent or 20 percent, depending on your income. Even if you didn't sell, if you hold mutual funds, your 1099-DIVs likely will show hefty capital gains distributions, and tax is due on that money.

5. You didn't have enough withheld. Folks who work for wages pay their annual tax liability throughout the year via paycheck withholding. A lot of folks over withhold, using it as a forced savings account that they cash in as a refund when they file their tax return the next year. That's not always a good idea, like recent COVID-affected tax seasons where the IRS fell behind in processing returns and sending out refunds.

Some workers, however, don't have enough taken out of their paychecks. Maybe they needed the cash to cover daily living expenses. Perhaps they didn't adjust for the loss of a dependent child who aged out of the tax break. Whatever the reason for being in the under-withholding category, it likely means no refund. In fact, you might owe the U.S. Treasury when you file.

There's nothing you can do now, other than come up with the tax money you owed. But you can avoid being in this situation next year by adjusting your withholding now. The IRS' online Tax Withholding Estimator, available in English and Spanish, can help. Then use the info to give your payroll office a new W-4.

Making sure your withholding is accurate early in the year means that the shock to your paychecks won't be as great since it will be spread over many months.

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