Many Americans will be getting a smaller tax refund this year as the tax credits offered as pandemic relief have reverted back to pre-pandemic levels, the Internal Revenue Service (IRS) is warning. Tax season officially began Jan. 23 and ends with the April 18 Tax Day filing deadline.
With the recent policy changes, financial planners say now is a good time for taxpayers to get a sense of their financial standing and whether they qualify for refunds or owe money to the IRS. The average tax refund in 2022 was $3,039, a 7.5% increase from the previous year, thanks to government tax credits for children, dependent care, charitable deductions, and more generous income tax credits.
For some taxpayers, the loss of these pandemic-era benefits could make this tax season more stressful than previous years—especially at a time when rising prices are already making it harder to pay the bills. Roughly one-third of Americans depend on tax refunds to make ends meet, a recent Credit Karma survey found. Gen-Zers and Millennials are even more likely to depend on the payment as they look to build up their savings, pay down debt, and fund extra expenses like vacations, according to the survey.
“People don’t usually go wild with their tax refund checks, especially lower-income and low-wealth households,” says financial expert Lynnette Khalfani-Cox, also known as the Money Coach. “They really do tend to use the money to cover necessities, like food and rent payments or utilities. But now is definitely not the time to splurge. You want to be wise and prudent about how you utilize your tax refund check.”
Three days into tax season, Mark Steber, chief tax information officer at Jackson Hewitt, says he hasn’t noticed a “dramatic” decrease in the amount of refunds people are receiving just yet, but that it’s still enough to impact lower-income Americans. “The refunds are more in line with what we saw in 2020,” he says. “We’re seeing more people filing earlier this year, I think as a result of the economic difficulties in the country. People need that refund.”
But Steber advises people to lower their expectations this year. “A lot of people use last year’s tax refund as the barometer for what to expect,” he says. “But last year’s tax refunds were so much higher due to the increase in credits that a lot of people don’t fully appreciate what to expect until they go and file their tax return.”
Here’s what to know at the start of this tax season.
Which pandemic-era benefits expired?
Two years ago, the federal government expanded several tax credits for 2021 to help support families through the financial hardships during the COVID-19 pandemic, when many Americans were out of work. But those changes were just temporary, and Congress did not vote to make the benefits permanent, meaning the credits reverted back to pre-pandemic levels for 2022.
The child tax credit, available to working parents who meet certain income and other rules, provided as much as $3,600 per child in 2021. More than 36 million families with about 61 million children benefited, though the credit has returned to a maximum of $2,000 per child for eligible families in 2022. As a result of the change, a family with three young children that would have received as much as $10,800 in 2021 would get at most $6,000 in 2022. Children must be under the age of 17 to qualify, and the credit gets reduced for families with a modified adjusted gross income above $400,000 on a joint return or $200,000 on a single or head-of-household return.
In addition, the child and dependent care credit, available to parents and those who need care for family members while they work, returned to a maximum of $2,100, down from $8,000 in 2021. Parents and guardians qualify for this tax break if they paid a daycare center, babysitter, summer camp or other care provider for children under the age of 13 or a disabled dependent of any age.
The earned-income tax credit, available to low- and moderate-income workers, is another refund that was expanded because of the pandemic and set to decrease this tax season. A qualifying taxpayer with no children who received about $1,500 in 2021 would now only receive $560, according to IRS figures. This refundable credit was created in 1975 to help lower-income workers offset the Social Security payroll tax and rising food and energy prices, but was made permanent in 1978 “as both an anti-poverty program and an alternative to welfare because it incentivized work,” according to the Economic Policy Institute. For the 2022 tax year, the earned income credit ranges from $560 to $6,935 depending on filing status and number of children.
Other changes this year include the end of a tax break up to $600 for certain charitable donations even if taxpayers just took a standard deduction—a flat amount that reduces taxable income—in their tax forms. Now, only those who itemize their various tax deductions can deduct their charitable donations. Nearly nine in 10 taxpayers took the standard deduction in 2021, according to the IRS.
Taxpayers may also see reduced refunds this year because of the end of COVID-19 relief stimulus payments, which were last sent in March 2021. No recovery rebate credit for stimulus payments are available on 2022 returns. Additionally, severance payments will be taxable, so those who were a part of the massive layoffs of 2022 may be bumped into a higher tax bracket as if they received a one-time bonus.
An extra burden on taxpayers
The various changes means many taxpayers will be receiving less money back from the government this tax season amid the highest inflation in 40 years. But it could also possibly result in a balance due in some cases.
Some taxpayers may find that they actually owe taxes this year because of the shrinking refunds, an increase in self-employment and the modification of W-4 forms, which were streamlined to have less withholding in some instances. “We already saw an increase in balance due and the size of the balance dues last year,” Steber says, “and we expect to see that again this year.”
Khalfani-Cox says the smaller tax refunds could also result in more people racking up credit card debt in 2023, particularly in lower-wealth households. “We already have seen some early signs of this because of inflation and higher prices for everything that people have run through their savings,” she says. “I would anticipate that a lot of people who would have typically gotten meatier tax refund checks from Uncle Sam will now have to use their credit card to otherwise cover expenses that would have been taken care of with that typically big tax refund check.”
The possibility of owing money is one of the reasons financial planners suggest getting a head start on filing, rather than waiting until the last minute to submit payments.
“It’s important for taxpayers to be aware of these changes—as they may impact their refund,” says Kathy Pickering, Chief Tax Officer at H&R Block. “Awareness can limit any surprises when filing taxes or making plans for what they’ll do with their refund.”
Steber says taxpayers can also avoid refund shock by “reflecting on your life and other things that went on in your world to make sure that you get every credit and you leave nothing off the table this year.”
Those who do owe money have until the filing deadline on April 18, leaving about three months to save up the money. Those who can’t afford the full amount may qualify for a payment plan.
Other ways to increase refunds
Although the popular pandemic-era tax credits have been reset, other benefits still remain, Pickering says. Those who bought an electric vehicle in 2022, for instance, could qualify for a $7,500 tax credit thanks to the Inflation Reduction Act. However, vehicles purchased on or after Aug. 16, 2022 must have been assembled in North America to qualify.
In addition, more than a dozen states with budget surpluses enacted some type of tax cut or rebate in 2022, primarily in the form of expanded tax deductions, gas and grocery tax cuts, and immediate tax rebates. States offering some type of rebate or credit are California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, and Virginia.
Another way taxpayers can increase the amount of money they receive—or reduce the amount they owe—is to make an individual retirement account (IRA) contribution for 2022, which can be done until April 18. The annual limit on those contributions is $6,000, or $7,000 for those over 50. Contributions may be deductible if made to a traditional IRA, though the amount depends on modified adjusted gross income and whether the customer has an employer-sponsored retirement plan at work.
Financial experts also suggest maxing out Health Savings Account contributions for those who opened an account and are covered by an HSA-eligible health plan. Deductible 2022 contributions—up to $3,650 for single coverage or $7,300 for family coverage—can also be made until the April 18 tax filing deadline. Those older than 55 by the end of December may contribute another $1,000.
For anyone with qualifying stock and cryptocurrency investment losses in 2022, Khalfani-Cox says taxpayers can use those losses to offset capital gains up to $3,000 in ordinary income. That could be particularly helpful as stocks fell nearly across the board and mutual fund managers tried to make up for those losses by selling off more holdings than usual. “You might look at your 401(k) and think it looks more like a 201(k),” Khalfani-Cox says. “Even though your assets declined, you may find that your tax bills still got bigger because you received those gains that your mutual fund company distributed. Fortunately there’s a way to offset some of it.”
Filers hoping to get their payments in hand as quickly as possible should file returns electronically, experts say, and check for accuracy to avoid delays—especially after millions of returns were caught up in delays at the IRS during the pandemic. The agency currently has a backlog of about 10 million returns yet to process, though it said recently that most people who file electronically should get a refund within 21 days.
Tax day this year for most filers is Tuesday, April 18, though people in federal disaster areas, including the victims of the recent storms in California, will have until May 15.