Time to plan ahead to save money on tax changes
MINNEAPOLIS -- We're back to travel, back to buffets and back to more normal, but that also includes reverting to some pre-pandemic economics and tax policies.
As families complete their holiday shopping, financial planners and tax advisors are urging folks to start budgeting for a potential "refund shock" or "refund whiplash" because of smaller tax credits compared to last year.
"Maybe I'd get my pay stub and project it out for the year," Chris Mahowald, an accountant at Meuwissen, Flygare, Kadrlik & Associates, P.A, in Eden Prarie told WCCO.
Thanks to pandemic relief measures passed by Congress in the last year of the Trump administration, and especially during the first year of the Biden administration, many Americans got very big tax refunds earlier this year.
The average refund for 2021 was well over $3,000, more than 15% above the average pre-pandemic refund in 2019.
"I think people should take a look at their tax situation now so there isn't a surprise because all of a sudden we owe money that's not good. If we know now we can budget and plan ahead for sorts of things with that," Mahowald added.
Among the major provisions changing is the Child Tax Credit, which ballooned to $3,600 per dependent ages 0-6 and $3,000 per dependent ages 6-17. In 2022, the credit will revert back to $2,000 per dependent ages 0-17.
The Child and Dependent Care Tax Credit, meanwhile, is also seeing a similar reduction from 50% of up to $8,000 in expenses down to 35% of up to $3,000.
"The credits are dollar-for-dollar reductions of the tax you owe," Mahowald explained. "So if I owed $5,000 on my return, I have one child that's a dependent, I get a $2,000 tax credit for that. That would reduce the amount I owe from $5,000 to $3,000."
There is some good news for taxpayers, however, as the standard deduction will increase for married, head of household and single filers.
Tax returns for 2022 are due to the IRS by April 18, 2023.
Joe Delano contributed to this report.