In this article:
- Why Is Your Refund Smaller in 2023?
- Other Reasons Your Refund May Be Smaller
- How to Prepare for Tax Season
Will your tax refund be smaller in 2023? About halfway through the 2023 tax filing season (for 2022 taxes), the IRS reported the average refund was down 11.2%: $3,140 per taxpayer in 2023 compared with $3,241 in 2022.
Your refund may be smaller this year because of pandemic-related tax credits and deductions sunsetting, along with other factors that may play a role. Here's how your tax refund might change on your 2022 taxes.
Why Is Your Refund Smaller in 2023?
One reason your refund may be smaller this year is that pandemic-related tax credits and tax rule changes temporarily increased your tax refund last year. Among the key differences for 2022 taxes:
- There are no more Economic Impact (stimulus) Payments. The federal government didn't issue any stimulus payments in 2022, so it's no longer possible to claim one on your 2022 taxes.
- Child tax credits are back to normal. During COVID-19, parents claimed up to $3,600 per child in dollar-for-dollar tax child tax credits. In 2022, the child tax credit reverted to pre-pandemic levels: $2,000 per child.
- Child and dependent care credits are lower. Under the American Rescue Plan this credit was as high as $8,000. Now, it's returned to its pre-COVID levels. Parents can receive a credit for up to 35% of up to $6,000 in qualifying care expenses for two or more children, or 35% of up to $3,000 for one child.
- The earned income tax credit (EITC) drops if you don't have kids. During the pandemic, low-income taxpayers without children were eligible to receive a tax credit of up to $1,502. For 2022, this credit tops out at $560 for people without children.
- Charitable contributions aren't deductible unless you itemize. In 2021, a special rule made it possible to deduct charity contributions even if you took the standard deduction. That rule no longer applies for the 2022 tax year.
Other Reasons Your Refund May Be Smaller
Changes to your income and withholding may also affect the size of your return. Although these factors aren't specific to the 2022 tax year, they may have an impact on this year's tax refund if they apply to you.
- Reduced withholdings: If you reduced the amount of money withheld from your paychecks—maybe in response to tax changes in the prior year—you're likely to get less back at tax time.
- Added a side gig: Income from a side hustle will increase your tax bill. If you didn't pay quarterly estimates throughout the year, or your estimates were low, you are likely to owe.
- Sold investments: Capital gains on the profitable sale of investments, including real estate, are taxable.
- No student loan interest deductions: If you paid off your student loans or no longer meet IRS income requirements for deducting interest, your student loan interest deduction may have changed.
- Decreased retirement contributions: Contributing less to your employer's traditional 401(k) plan or a traditional IRA increases your adjusted gross income and raises your tax bill.
- Changed filing status: Any change in your filing status—single, head of household, married filing separately or married filing jointly—can change the way your tax liability is calculated and the amount of tax you owe.
How to Prepare for Tax Season
Preparing for this—or any—tax season and getting the refund you're entitled to is a matter of following a few basic steps.
1. Get Your Records in Order
Gather up your W-2, 1099 forms and any other documents you'll need to prepare and file your taxes. Throughout the year, be sure to save receipts for deductible expenses and any correspondence you receive from the IRS or your state taxing authority.
2. Meet With a Tax Professional
Although tax preparation software (or your own individual know-how) can help you do your own taxes efficiently, meeting with a tax pro helps ensure that you're claiming all the deductions and credits you're entitled to claim. A tax advisor can also help you plan for the year to come.
3. Get Online Help at IRS.gov
The IRS offers a wealth of information and interactive help for taxpayers. Among the most useful:
- Use Free File to file your IRS tax return. Guided online tax preparation is available to taxpayers with adjusted gross incomes of $73,000 or less; free fillable forms are available for anyone.
- Set up an online account and use the IRS tool to verify your identity. From there, you can access a range of benefits:
- Get a six-digit identity protection PIN that prevents other people from filing a tax return using your Social Security number or Individual Taxpayer Identification Number.
- Request a copy of your tax record, including transcripts of past tax returns, tax account information, wage and income statements, and more.
- Get answers to common tax questions about filing a tax return, claiming a dependent, eligibility to claim tax credits or deduct expenses, and more using the Interactive Tax Assistant.
4. Adjust Your Withholding and Pay Estimates
Once your taxes are done, make a plan for the year to come. Adjust your withholding, if necessary, to make sure your next tax bill will be covered. If you're self-employed and/or have outside income, consider calculating quarterly estimated taxes for the coming year so you'll owe less in the end.
The Bottom Line
While your tax refund may be a bit smaller in 2023 than it was last year, taking the time to file an accurate return and claim all of your eligible credits and deductions is still the best route to getting the maximum refund.
As an expert in taxation and financial matters, I bring a wealth of knowledge and experience to shed light on the intricacies of the article discussing why tax refunds might be smaller in 2023. My deep understanding of tax regulations, recent changes, and financial planning enables me to provide valuable insights into the factors influencing the size of tax refunds.
Let's delve into the concepts covered in the article:
-
Pandemic-Related Tax Credits and Deductions:
- The article highlights that pandemic-related tax credits and rule changes temporarily increased tax refunds in the previous year. This includes the absence of Economic Impact Payments (stimulus payments) in 2022, child tax credits reverting to pre-pandemic levels, and a decrease in child and dependent care credits. Additionally, the Earned Income Tax Credit (EITC) for individuals without children has decreased.
-
Charitable Contributions and Itemization:
- A significant change for the 2022 tax year is that charitable contributions are no longer deductible unless you itemize. In 2021, a special rule allowed deductions for charitable contributions even if the standard deduction was taken.
-
Other Reasons for Smaller Refunds:
- The article mentions various factors unrelated to pandemic-related changes that can affect tax refunds. These include reduced withholdings, income from a side gig, capital gains from selling investments, changes in student loan interest deductions, decreased retirement contributions, and alterations in filing status.
-
Preparing for Tax Season:
- The article provides practical tips for preparing for tax season, emphasizing the importance of getting records in order, meeting with a tax professional, and utilizing online resources provided by the IRS. It also advises adjusting withholding and pay estimates for the upcoming year.
-
Online Help at IRS.gov:
- The IRS website is highlighted as a valuable resource, offering tools such as Free File for tax return filing, online account management for identity verification, and access to a range of services, including obtaining a six-digit identity protection PIN and requesting tax records.
-
Adjusting Withholding and Pay Estimates:
- The article concludes by advising individuals to adjust their withholding after filing taxes and to consider calculating quarterly estimated taxes for the coming year, especially for those who are self-employed or have additional income.
In summary, the article provides a comprehensive overview of the various factors contributing to smaller tax refunds in 2023, covering both pandemic-related changes and general financial considerations. The inclusion of practical tips for tax preparation and planning adds a layer of actionable advice for readers.
