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2021 Tax Refunds May Disappoint

by
Gordon W. McNamee
on
1/24/2022
2021 Tax Refunds May Disappoint

If you are one of the millions of Americans who eagerly await the arrival of your tax refund, we have bad news for you. Like much else about 2021, there's a good chance that this year's check will disappoint. Both the moves made in response to the pandemic's impact and an unexpectedly good year for mutual funds are working against many taxpayers used to sizeable refund checks.

Tax refund checks reflect overpayment of taxes. Overpayments reflect the difference between the taxes submitted or withheld over the course of the year and the impact that various deductions make on the amount that is owed. Some people use the standard deduction and others itemize, but one way or another the calculation leads to a credit that many people treat like it is an annual disbursement from a savings account. They look forward to it and use it to pay down bills or as funds for upcoming expenditures.  Unfortunately, there are a few reasons that in 2021 taxpayers are likely to see that difference diminished.

Major Differences in 2021

As the global pandemic continued to wreak havoc on the American economy, Congress passed the American Rescue Plan, which increased the amount of the child tax credit from $2,000 per child age 18 and under to $3,000. It also provided an additional $600 for each child under the age of six and gave the option of getting half of their credit in cash, either as a $250 or $300 check each month in the second half of the year. Millions took advantage of this cash-in-hand without giving thought to the fact that it would eventually impact their tax refund. Where in previous years the full credit was used to lower tax liability and would be seen in the form of a refund, under the new plan those parents who took half of the cash ahead of time will no longer have the amount that they received to use as a credit. Some who are above the various phase-out thresholds put in place by the government may even end up owing money based on their adjusted gross income.

Another impactful change introduced with the pandemic was the hold put on monthly student loan payments. Nearly all federal borrowers took advantage of the chance to stop paying the U.S. Department of Education back for student loans through 2021, but in doing so they lost their ability to write off any interest they were paying on those loans. With up to $2,500 of interest typically available for deduction, the 90% who took advantage of the relief may end up missing this “above-the-line” tax break. With many adding up to $600 as a result of the reduction in their gross income, it's a big chunk of change that they are likely to miss, and this is especially true for low-to-middle-income individuals, who fall far short of the adjusted gross income thresholds that phase the benefit out. 

Finally, while individuals across the country were struggling to get a foothold in the face of the pandemic, mutual funds had a stellar year in 2021, and as a result, many had year-end payouts that were high enough to make a significant change in capital gains distributions in taxable accounts. These extra costs today will likely be offset in the future when the increase in the mutual fund's original purchase prices will diminish what is owed in taxes on gains in the future.

If you are uncertain about how the economic trends and shifts seen in 2021 will impact your tax liability, now is the time to seek professional guidance.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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