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Don’t depend on that tax refund but. Why it might be smaller this yr

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Bill Oxford | E + | Getty Images

If you bet on a tax refund, financial experts say it may be less or you may owe money this season.

Typically, you can get a federal tax refund if you’ve paid or withheld more than you owe based on taxable income.

The IRS subtracts the larger of the standard or individual deductions from Adjusted Gross Income to arrive at taxable income, and there are a few reasons why it could be higher in 2021.

Advance payments of child tax deductions

The American rescue plan, signed by President Joe Biden in March, increased the 2021 child tax credit from $ 2,000 per child under 17 to $ 3,000, with an additional $ 600 for children under 6.

Millions of families got half upfront from July through December with monthly payments of $ 250 or $ 300, meaning they have less depreciation at tax time.

“Working families don’t expect that,” said Tommy Lucus, certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida. “And it will be a shock to her.”

For example, if you qualified for a $ 3,000 tax credit and received $ 1,500 upfront payments, you will claim the remaining $ 1,500 when filing a tax return.

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That’s $ 500 less than the $ 2,000 received last year, assuming you have the same income, he explained, and things can be worse with multiple children.

“It could be the difference between getting a small refund and having a lot of money,” said Lucus.

In addition, you may have to refund part of the tax prepayment if the adjusted gross income exceeds certain limits in 2021.

Withdrawal begins for single parents above $ 75,000 or joint applicants above $ 150,000. Families will lose entitlement to the increased tax credits of over $ 95,000 for single parents and $ 170,000 for married couples filing together.

Student loan payments suspended

In March 2020, the U.S. Department of Education gave millions of Americans an option to suspend monthly student loan payments, and nearly 90% of borrowers agreed.

While the break offered some relief until 2021, there is a compromise at tax time: no depreciation for the interest on student loans.

Typically, borrowers can deduct up to $ 2,500 in interest based on how much they paid, and it’s an “above the line” tax break that reduces gross income without even breaking down the deductions.

After this adjustment, it could be $ 500 or $ 600 in real money at the end of the day.

Patrick Amey

Consultant at Financial Advisory Service, Inc.

The $ 2,500 benefit begins in 2021 with a modified Adjusted Gross Income of over $ 70,000 for single filers and $ 140,000 for joint returns.

Individual borrowers over $ 85,000 or couples filing over $ 170,000 together are not eligible.

It’s important for low- to middle-income applicants making student loan payments, said Patrick Amey, CFP and advisor with the Financial Advisory Service in Overland Park, Kansas.

“After that adjustment, it could be $ 500 or $ 600 in real money at the end of the day,” he said.

Distributions from mutual funds

Mutual fund investors may also see a higher tax burden for 2021 due to the higher year-end payouts.

“I think sometimes capital gains distributions on taxable accounts come as a surprise to investors,” said Clark Randall, a Dallas-based CFP and founder of Financial Enlightenment.

Many actively managed mutual funds had a strong year, spewing high single- or double-digit payouts in December, triggering additional taxes on broker accounts.

While the levies can increase liability in 2021, the profits also add to the mutual fund base or original purchase price, reducing future bills.

“Of course none of us want to pay taxes,” said Randall. “But paying a little on the go isn’t necessarily bad.”

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