Tax Surprise! If You Received COVID Benefits, You Could See No Refund — or Even a Bill

Coronavirus Covid19 on one hundred dollar bill.
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If you are one of the 75% of Americans who receive a tax refund annually, 2022 could bring an unwelcome surprise. Your tax refund could be smaller, non-existent, or you may even find that you owe the IRS money on April 15.

See: The Cost of COVID-19 for the US in 2021
Find: Stimulus Update: You Could Still Qualify for a $1,400 Payment — Here’s What To Double-Check on Your Taxes

CNBC reported three reasons Americans could owe money at tax time this year:

  • The advance Child Tax Credit.
  • Paused student loan payments.
  • Mutual fund distributions.

If any of these financial situations applied to you in 2021, read on to see what the tax ramifications could be — and how you can prepare.

Advance CTC Could Leave Some Parents Owing Money

The advance CTC increased the total child tax credit from $2,000 to $3,600 for children under 6 and to $3,000 for children between the ages of 6 and 17. Half of the payments were distributed on a monthly basis between July and December of 2021, which means even though the total amount of the credit is higher, you could get less back at tax time.

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For instance, if you had one child and previously received a $2,000 credit, you’ll only receive a $1,500 credit off your tax bill when you file. If you have more than one child, you could be liable for a large portion of your tax bill that you’d written off in previous years. And if you’re used to getting $2,000 or more back as a tax refund — you’ve already gotten half of that money as payments distributed throughout the second half of last year.

It could be worse for families who saw their income rise in 2021. Single parents who made more than $75,000 in 2021, and married couples filing jointly who made more than $150,000 in adjusted gross income, could have to return a portion of the advance CTC they already received. If you made more than $95,000 as a single parent or $170,000 as a couple, you’ll have to return the entire credit.

Paused Student Loan Payments Mean You Can’t Deduct Interest

Nearly 90% of student loan borrowers took advantage of the option to pause their student loan payments in March 2020. And while the financial boost may have offered temporary relief during the pandemic, those who paused their payments may not have thought about the tax consequences of having done so.

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Normally, you can deduct up to $2,500 of interest, which reduces your gross income – even if you don’t itemize your tax deductions. Depending on what tax bracket you fall into, an extra $2,500 on your AGI could mean you’ll pay an extra $500 or $600 on your tax bill, tax experts told CNBC.com.

Strong Mutual Funds Could Mean More Taxes for Investors

If you took capital gains distributions from your mutual funds this year, you may have received more than you did in the past thanks to a bullish market. But you may not have accounted for that extra capital gains income on your tax bill.

Learn: Reconcile the Child Tax Credit on Your 2021 Tax Return — Here’s How
Explore: Is Your 2021 NFT Transaction Taxable?

At this point, with 2021 closed out on the books, it’s too late to use tax loss harvesting strategies or sell the fund to avoid the capital gains tax. It’s best to speak with your tax accountant and your financial advisor to determine your best steps for 2022 if investment gains remain strong throughout the year.

Unemployment benefits claimed may also be problematic come tax time, so be sure to consult your accountant or financial advisor regarding these benefits, as well.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.

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