Expecting a tax refund this year? As of December 2021, the IRS issued over 169 million refunds during the calendar year including those for individuals who didn't have a filing obligation but chose to file to request their economic impact payments. The average refund in 2021 was $2,879. But if you’re hoping for a big tax refund in 2022, you may be in for a surprise. Here are some of the potential reasons your refund might be smaller than you expected.
- The 2017 Tax Cuts and Jobs Act (TCJA) may limit the amount of tax refund you'll receive through at least 2025.
- Tax reform brought on the by the TCJA eliminated certain deductions including moving, casualty and theft, job search, and unreimbursed work expenses such as travel and meals.
- The IRS is allowing individuals to deduct charitable contributions made during calendar-year 2021 of up to 100% of their adjusted gross income.
- The IRS has increased standard deductions for tax year 2021 including $12,550 for individuals and married couples filing separately, and $25,100 for married couples filing jointly.
Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act (TCJA) was the largest tax overhaul since 1986. It made some major changes to the federal tax code that won’t expire until at least Dec. 31, 2025.
Some of the most notable tax law updates include:
- Lowering the mortgage interest deduction: Before 2017, taxpayers could deduct interest on up to $1 million in mortgage loans. The TCJA now allows taxpayers to deduct interest on up to $750,000 in mortgage loans.
- Bulking up the standard deduction: This change allows more taxpayers to avoid the hassle of itemizing write-offs on their tax return, because the bigger standard deduction often exceeds their qualifying expenses. However, personal exemptions have been eliminated.
- Updating state and local tax deduction amounts: The so-called SALT deductions are now capped at $10,000, which could decrease your chances of seeing a bigger tax refund if your state and local tax payments are well above that amount.
- Setting new restrictions on unreimbursed casualty losses: Before 2017, such losses were deductible if they exceeded $100 plus 10% of the adjusted gross income. Now, you’re only allowed to deduct such losses if they occur in a “presidentially declared disaster area.”
- Eliminating alimony deductions: Taxpayers no longer get to deduct alimony, but the payments are tax-free for the ex-spouse who receives them.
Child-support payments are not eligible for a tax deduction for payees, nor are they considered taxable income for recipients.
Tax Refunds and Itemized Deductions
Itemizing deductions is one way to snag a bigger tax refund if you’re able to substantially reduce your taxable income for the year. Tax reform, however, eliminated certain deductions that you might have claimed previously, including:
- Moving expenses (only members of the military can claim them now)
- Casualty and theft expenses
- Alimony payments
- Tax prep fees
- Investment advisory fees
- Job search expenses
- Unreimbursed work expenses, including travel, meals, and parking
Will tax returns be bigger if you itemize and claim charitable deductions? Maybe.
The TCJA raised the maximum cap on charitable contribution deductions from 50% of adjusted gross income to 60%. However, the IRS has temporarily suspended those limits, so individuals may deduct contributions made during calendar-year 2021 of up to 100% of their adjusted gross income.
Under the TCJA, you can no longer deduct interest paid on home equity loans, unless loan proceeds are used to substantially improve the property.
Increased Standard Deductions
Tax reform raised the standard deduction limits. Depending on your expenses, itemizing may lose some of its luster if your itemized deductions no longer exceed the standard deduction. For the 2021 tax year, for example, standard deduction amounts are as follows:
- $25,100 for married couples filing jointly
- $18,800 for heads of household
- $12,550 for individuals and married couples filing separately
These higher standard deduction limits, which will again increase for tax year 2022, are designed in part to make up for the loss of the personal exemption, previously worth $4,050. In the past, taxpayers were able to claim the exemption for themselves and their dependents, if eligible.
Consider using an online refund estimator tool to determine whether itemizing or claiming the standard deduction might yield a bigger tax refund.
Changes to Tax Brackets
Another key change of tax reform involved the tax brackets. The tax code kept seven brackets but changed the marginal tax rates within each of them. For the 2021 tax year, personal income tax rates range from 10% to 37%, depending on your income.
Making more money—and having fewer deductions you could claim—could be a double whammy if it results in having more taxable income for the year. That change, plus a higher effective tax rate, might mean you wind up with a smaller than expected tax refund.
If you received unemployment benefits for part of the year and opted not to have taxes withheld from them, your refund could also be less than expected.
Plan Ahead for Next Year
If you were disappointed at not getting a bigger tax refund this year, it’s never too soon to consider your tax planning efforts for next year. Here are some tips for pumping up your refund or minimizing the odds of owing money for the 2021 tax year:
- Contribute to a health savings account (HSA) if you have a high-deductible health plan, since those contributions lower your taxable income.
- Funnel tax-free money into your flexible spending account (FSA) if you have one of those instead.
- Open a traditional IRA or bump up contributions to your 401(k), both of which can reduce your taxable income.
- Increase your charitable giving efforts to take advantage of the larger deduction for those contributions.
- Use the IRS EITC Assistant tool to determine whether you’re eligible for the Earned Income Credit.
- Harvest losses in your taxable investment account to offset any taxable capital gains.
Keep in mind that the changes enacted under tax reform are only effective through 2025 (as of now). It’s a good idea to revisit your tax strategy each year to make sure you’re always getting the biggest refund possible.
If you’d rather get more money in your paychecks as opposed to getting a tax refund, update your Form W-4 with your employer to adjust your tax withholding.
Frequently Asked Questions (FAQs)
Why is my tax refund lower compared to previous years?
The 2017 Tax Cuts and Jobs Act (TCJA) instituted tax reform that cut several notable deductions in process including:
- Unreimbursed employee expenses such as travel and meals.
- Job search expenses
- Tax preparation fees,
- Casualty and theft losses, with the exception of losses occurring in federally declared disaster areas.
In addition, personal exemption state and local taxes have been capped at $10,000 through 2025.
How do I get a bigger tax refund?
There are several ways you can potentially increase your tax refund for tax year 2021 including:
- Choose the most ideal filing status for your financial situation to help lower your taxes and increase your refund.
- Claim the earned income tax credit (EITC) if you are eligible. This credit helps taxpayers reduce federal income tax liability by a certain amount set yearly. You may even get a tax refund if you don’t owe any tax.
- If eligible, you can claim the child tax credit, which has increased for the 2021 tax year thanks to the American Rescue Plan to $3,600 for children five and under and $3,000 for children ages six through 17. This can decrease your taxes and help you get a bigger refund.