Taxes 2021: How the Child Tax Credit and Student Loans Could Reduce Your Total Refund

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Olena Yakobchuk /

Many Americans look forward to the new year when they will receive a windfall from the government in the form of a tax refund. Some use the money to pay down debt, while others might go on vacation or fund a home remodel. Therefore, it helps to know what you can expect each year, as it can help you plan ahead.

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According to Forbes, tax refunds can differ from year to year based on income changes, the amount of money you have withheld from your paycheck and major life events such as a marriage or the birth of a child. Typically, we know these events have happened and can plan ahead — either by setting aside money to pay additional taxes, changing our withholding amounts or just looking forward to a larger refund in the case of a new child.

But, due to changes in tax laws as a result of the pandemic and the stimulus, some Americans could be blindsided this year, getting a smaller tax refund than they received in 2020. Some might even face an unexpected tax bill.

Will your tax refund be smaller this year? Here are some factors that could affect you and the amount of taxes you owe for 2021.

Collecting the Advance Child Tax Credit Payments

If you received the advance Child Tax Credit (CTC) payments deposited into your bank account in the latter half of 2021, you could receive less of a tax refund. Even though the government increased the amount of the total CTC from $2,000 per child to $3,000 per child (for kids 6 through 17) and up to $3,600 for children under 6, you won’t be claiming the full amount on your taxes since you already received half the funds. Since this is a fully refundable tax credit that shaves money off your tax bill or adds to your refund, your refund might be lower if you took half the credit in advance.

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Related: Your November Child Tax Credit May Need to be Paid Back – Here’s Why

Additionally, if you qualified for the advance credit based on 2020 income, but your income for 2021 was higher than $150,000 per couple or $112,500 for a head-of-household filer, you may have to return a portion of the tax credit when you file your returns. Again, this could reduce your refund or even result in a tax bill.

Holding Federal Student Loans with No Interest

In March 2020, as part of the American Rescue Plan, the government halted federal student loan payments and set student loan interest at 0%. The deferment is set to end on January 31, 2022.

More: Your Employer Can Pay $5,250 Annually Towards Your Student Loans Tax-Free Until 2025

If you usually deduct federal student loan interest from your taxes, you won’t have as much to deduct this year. Typically, you can deduct up to $2,500 in interest payments as long as your modified adjusted gross income (MAGI) is below $70,000. At $70,000, it begins to phase out until you no longer qualify for any deductions at $85,000. For married couples, deductions between to phase out at $140,000 and disappear at $170,000.

Student Loan Defaults

While it won’t affect your tax bill per se, if you are in default on your student loans, you may not receive your tax refund at all. On February 1, 2022, the government could be permitted to retain your tax refund to pay your student loan debt if you are in default. Stay tuned, however, because advocates are pushing for a transition period of up to 90 days before collection actions can resume.

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What To Do If You Are Afraid of a Smaller Refund or Larger Tax Bill

If you are afraid of a smaller tax refund this year, there’s still time to opt out of receiving the last of the advance CTC payments. Visit the CTC Update Portal by November 29, 2021 to opt out of the Dec. 15 payment (but be aware that both parents must opt out of the payment). The additional payment could make a bit of a difference in your 2021 tax returns.

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If your income has changed substantially, you have student loan debt that previously offered deductions for interest or you just aren’t sure how to file amid all the changes, consult with a tax professional.

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