What are you looking forward to in 2023? King Charles III's coronation? The return of Succession and The Mandalorian?
If you answered "a juicy tax return," we've got some bad news.
“Refunds may be smaller in 2023,” the IRS noted in a news release about the upcoming tax season, which just kicked off Jan. 23.
What gives? Here's why 2023 won’t bring a hefty tax return for many households and what else you should know now that this year’s filing season is underway.
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Why refunds may be smaller this year
During the pandemic, the IRS was doling out some pretty sizable refund checks. In 2022, the average tax refund was $3,176 — a 14% jump from $2,791 in 2021, according to the IRS.
But in 2022, there were no new stimulus checks from the federal government. And some expanded tax credits and deductions, like for charitable gift deductions and child care, have reverted back to pre-pandemic amounts.
Back in 2020, Congress introduced a new incentive to encourage charitable giving. Taxpayers could claim up to $300 for cash donations (or $600 for married couples filing together), even if they didn’t itemize — but this provision wasn’t extended for 2022.
And families with children will see their child tax credit shrink, since it’s reverting back to the pre-pandemic level of $2,000 per child. In 2021, the credit was as high as $3,600 per child.
Which means the days of supersized refunds are over. To make matters worse, those smaller refunds may take longer to arrive in your bank account.
The tax agency, which has been suffering from a staffing shortage for years, has also warned some returns will take longer. Hoping to get in front of that, the IRS has cautioned filers shouldn’t count on receiving refunds by a certain date — especially if they’re planning to use those funds to make big purchases or pay off bills.
A smaller refund isn’t always a bad thing
One important thing to remember about tax refunds is you usually only get them when you’ve overpaid on your yearly taxes or withheld more than what you owe — which means a refund is just the government paying you back money that was already yours to begin with.
You essentially gave the revenue agency an interest-free loan throughout the year, when that extra cash could have gone toward your financial goals instead, whether that’s paying down debt, building up an emergency fund or saving for retirement.
The exception, of course, is when you can claim a refundable tax credit on things like heat pumps or child care.
The IRS suggests checking your tax withholdings early in the year, so now’s the perfect time to pull up those paystubs and review your W-4 forms.
Figuring out whether your employer withheld too much will take some math: You’ll have to add up your withholdings for each pay period and subtract your estimated tax liability from the total.
Whatever’s left over is your potential tax gap. From there, if you need to adjust your withholdings, you’ll have to fill out a new form.
If you’ve got a more complicated tax situation or you’re not sure where to start, you might consider speaking to a tax professional.
Maybe by this time next year, you’ll be looking forward to an even smaller refund in 2024.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.