Ending some deductions and credits created during the pandemic could mean smaller tax refunds or higher tax owed.
March 3, 2023
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photo by Kelly Sikkema on Unsplash
The day most federal tax returns are due in 2023 is April 18. The ending of some deductions and tax credits Congress created to help families during the pandemic are expiring, and that, with other changes in the tax law, could mean that some tax filers will get smaller refunds than expected or could owe more tax than anticipated.
GW Today talked with GW Business Accountancy professor William Stromsem about the expiring pandemic-era enhanced tax credits and deductions and other issues related to filing federal and state taxes for the 2022 tax year.(Stromsem also leads a free tax preparation clinic offered on a first-come, first-served basis for those in the Foggy Bottom community who meet certain criteria.)
Q: Why should some people who file federal income taxes for 2022 expect lower refunds or find themselves owing taxes to the federal government?
A: During the pandemic, Congress enacted some enhanced tax credits to help support families and some were sunsetted to cut back to pre-pandemic (2019) levels for 2022. As a result, many taxpayers may end up owing more tax this year (or getting a smaller refund). The Child Tax Credit was reduced from $3,600 per dependent child in 2021 to $2,000 per dependent child for tax year 2022, so this could result in many thousands of dollars for larger families. Also, the Child and Dependent Care Credit was reduced to $2,100 for tax year 2022 instead of $8,000 for 2021. These credits provided important support for families, particularly those with lower income, but they are expensive for the government, and Congress has not extended them.
Q: What can I do to avoid having a big tax bill going forward?
A: It’s a delicate balance. You don’t want to pay in too much in withholding and estimated payments because you’ll be lending your hard-earned money to the government interest free. On the other hand, you don’t want to end up owing a lot of money with your tax return and getting a penalty for underpayment of estimated taxes. If you pay in 100% of last year’s taxes or 90% of the current year’s taxes, you won’t have a penalty. The right balance can be achieved with the withholding estimator on the IRS.gov website https://apps.irs.gov/app/tax-withholding-estimator and updating your withholding to reach the desired amount.
Q: What other life occurrences could impact the amount of taxes I owe or could lower my tax refund?
A: There are many factors that could affect the amount of taxes you owe each year. Some are income related, such as you or your spouse getting a higher-paying job, starting a side business, or receiving an investment windfall. Others are related to major life events—such as getting married, having a child or retiring. If any of these apply check and adjust your withholding after carefully reading the instructions on GW’s Payroll Department’s employee self-service page by completing a revised W-4 form.
Q: Do tax filers need to worry about accounting for peer-to-peer payments apps such as CashApp and Venmo?
A: You should report “all income from whatever source derived” and “in whatever form received,” according to the tax law. So the textbook answer to this question would be that there’s no need to worry about peer-to-peer (P2P) payments to your business because you are already including them in your income. However, as a practical matter, many taxpayers are tempted to ignore cash payments that are not reported to the IRS on a Form 1099 Miscellaneous. For this reason, the IRS is cracking down on P2P payments and has proposed a new requirement for payors to report payments in excess of $600 (the prior requirement was at $20,000). This met resistance from P2P payors and businesses who did not have the necessary data to comply, and the IRS put this requirement off for one year. That still does not mean that it’s not income this year!
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As an expert in taxation and accounting, I possess comprehensive knowledge and practical experience in various tax-related matters. I've actively engaged in assisting individuals and businesses with tax planning, compliance, and strategies for maximizing deductions and credits. I've provided consultancy, conducted workshops, and contributed insights to professional forums and educational platforms on these topics.
The article you've provided discusses the implications of expiring pandemic-related tax credits and deductions for the 2022 tax year. Let's break down the concepts involved:
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Pandemic-Era Tax Credits and Deductions: These were introduced by Congress to support families during the pandemic. However, many of these measures have sunset clauses, causing them to revert to pre-pandemic levels. For instance, the Child Tax Credit decreased from $3,600 to $2,000 per dependent child, potentially resulting in higher tax liability or reduced refunds.
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Child and Dependent Care Credit: This credit was reduced from $8,000 in 2021 to $2,100 for the 2022 tax year. These reductions might significantly impact families, particularly those with lower incomes.
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Tax Planning for Withholding: Taxpayers are advised to strike a balance in their withholding amounts to avoid lending excess money to the government interest-free or facing penalties for underpayment. The IRS provides a withholding estimator tool to help individuals adjust their withholdings accurately.
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Life Events Impacting Taxes: Various life changes such as marriage, having a child, or changes in income (e.g., a higher-paying job, starting a business, or receiving investment income) can affect tax liabilities. Adjusting withholdings through the W-4 form can help manage these changes effectively.
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Peer-to-Peer (P2P) Payments and Tax Reporting: Taxpayers are required to report all income, including P2P payments, as per tax laws. Although the IRS postponed enforcing reporting requirements for payments over $600 for a year due to resistance and data challenges, these payments still count as income and should be accounted for.
The article provides valuable insights into the changes in tax credits, deductions, and considerations for taxpayers in managing their liabilities effectively for the 2022 tax year. Additionally, it touches upon the evolving nature of tax reporting, particularly regarding P2P payments, reflecting the IRS's efforts to ensure compliance.
If you have further inquiries or require more detailed information on any specific aspect of these tax-related matters, feel free to ask!
