Changes to Tax Credits Resulting in Lower Tax Refunds

Many taxpayers may be surprised that the amount of their 2022 tax return is lower this filing season, leaving them to wonder, “Why is my tax refund so low?” This may be due to certain tax credits reverting to the rules in effect prior to 2021 and the expiration of the Recovery Rebate Credit.

These are the reasons some tax refunds may be lower for taxpayers that claimed these credits in 2021 and will claim them again in 2022:

Child Tax Credit Changes

The Child Tax Credit has reverted to the rules that were in effect in 2020 as follows:

• The credit amount has been reduced to $2,000 for each qualifying child.
  • $1,500 of the credit for each qualifying child is eligible to be refundable.
  •  A qualifying child is a child under the age of 17.
  • For a taxpayer to qualify for the refundable portion of the credit, they must have earned income over $2,500.
  • The Advance Child Tax Credit did not apply to 2022.

Child and Dependent Care Credit Changes

• This credit is non-refundable for Tax Year 2022.
  • Maximum of qualifying childcare expenses are:
    • $3,000 for one qualifying person – Maximum credit is $1,050
    • $6,000 for two or more qualifying persons – Maximum credit is $2,100
  • The maximum credit percentage rate is 35% for taxpayers with AGI of $15,000 or less.
  • Credit percentage gradually decreases for AGI between $15,000 and $43,000 until it reaches 20%.

The Recovery Rebate Credit is No Longer Applicable

Since the federal government did not distribute any Economic Impact Payments (stimulus payments) in 2022, the Recovery Rebate Credit does not apply to 2022.

See the full list of federal Tax Changes for 2022, as well as Critical State Income Tax Changes for 2022 for more information on changes that could result in lower tax refunds for 2022.

Other Reasons Your Tax Refund May be Lower This Year

There may be other reasons that a taxpayer’s refund may be lower this year, such as a change in the number of dependents being claimed, change in filing status, change in employment, increase in self-employment income, or other factors that occur during 2022 that did not occur in earlier years. However, for taxpayers that claim the child tax credit and/or the child and dependent care credit for 2022, the changes listed above are most likely the reason why their tax refund may be lower.