What Can Make My Taxes Go Up?

But what changes can make your taxes go up? Here’s a quick look at how your taxes may be affected by the change to the special COVID provisions.

The changes to the Child Tax Credit and the Additional Child Tax Credit can definitely reduce your refund. The credit reverted to 2020 rules and the credit is again $2,000 per child 16 and under (was 17 and under and  $3,000 or $3,600 for children under 6), up to $1,500 of the credit is refundable instead of the full credit, and taxpayers again have to have earned income to get the credit.

There is also the change to the Child and Dependent Care Credit (the daycare credit) for children under 13 or anyone on the tax return unable to care for themselves while the taxpayer (both if a joint return) work. This credit is back down to allowing expenses of $3,000 for one person and $6,000 for more than one (was $8,000 and $16,000); the credit is nonrefundable (was fully refundable last year), and the percentage of expenses for the credit is back to 20% for most taxpayers (from 50%).

The Earned Income Tax Credit (EITC) for taxpayers with no children has seen the largest change. For one year the credit was almost tripled ($1,502) but it is back to $560 and the minimum age was 19 with no maximum age. Now the credit is limited to those between 25 and 65.

Outside of tax reform, there are some other key reasons your taxes might increase:

• If you’ve changed jobs or careers, and gotten an increase in income, congratulations! However, this can cause an increase in taxes and require changes to your withholdings to ensure you have enough taxes withheld during the year.
• You’ve gone from being an employee with a W-2 to a contractor, freelancer, small business owner, or another type of self-employed worker. Unfortunately, because you’re working for yourself, you’ll have to pay self-employment taxes, meaning you’ll have to cover all the Social Security and Medicare taxes on your income, instead of just half, as you would were you a W-2 employee.
• If you’ve won a monetary prize of some kind, your income will increase and the amount of withholding from the winnings generally isn’t enough to cover your new, higher taxes. For example, if you’ve won the lottery, it’s a safe bet your winnings won’t have enough withheld from them for taxes, and you’ll owe the government come tax time.
• If you’ve withdrawn money from your retirement plan or IRA before you’re 59 ½ years old, you’ll have to pay the additional penalty of 10% for withdrawing the money early. And you have to pay taxes on the withdrawal unless it is a Roth account.
• If you’ve had a child graduate and move out on their own, they are generally no longer a dependent. Even though there are no longer any exemption deductions, you also won’t be able to claim the credit for other dependents.

Don’t worry if this is overwhelming. Jackson Hewitt Tax Pros are here to help make sense of the changes. Make an appointment today. 

Jackson Hewitt Editorial Policy