Between now and Tax Day — April 18 this year — you may discover that you’re in line for a smaller refund than you got on your 2021 taxes. And you won’t be able to say the IRS didn’t warn you.
“Refunds may be smaller in 2023,” the IRS said in a November news release. “Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no economic impact payments for 2022.”
The stimulus package is just one of the pandemic-era tax perks that are no longer on the table for 2022, a rollback which may reduce refunds by hundreds or even thousands of dollars, tax experts say.
“A lot of people are going to be in for sticker shock when they fill out taxes,” says Robert Farrington, a personal finance expert and founder of The College Investor.
The average refund for the 2022 tax filing season was $3,176, up nearly 14% from $2,791 the year before, according to the IRS.
Even though the 2022 tax year is in the books, you still have time to prepare for a lower refund or even take steps to lower your federal taxable income. Here’s what you need to know.
Why your refund may be about to shrink
The status of your refund likely depends on whether you took advantage of a number of Covid-era tax breaks available in tax year 2021. If you did, there’s a chance you could owe a bigger tax bill for 2022 — or be owed a smaller refund.
Some of the changes to keep an eye on:
- No more stimmies. Remember those? Millions of Americans received a $1,400 stimulus payment in 2021. Some people got payments straight to their bank account or by mail, but you may have received it as a rebate on your 2021 tax return. That won’t be happening in 2022.
- Child tax credit. Tax year 2021 featured an enhanced child tax credit of $3,000 for children under 18 and $3,600 for children under 6. For 2022, it’s back to the old rules: $2,000 for children under 17. If you were planning on claiming the credit for your 17-year-old this year, you’re out of luck.
- Child and dependent care. Those who claimed a tax break on child and dependent care last year are seeing a reversion to lower limits as well. A credit for expenses such as day care was worth up to $8,000 in 2021, but for 2022 maxes out at the old threshold of $2,100.
- Charitable contributions. Deducting charitable contributions is generally a tax move reserved for the small percentage of taxpayers who itemize deductions. Pandemic-era rules, however, allowed all taxpayers to deduct up to $300 ($600 for married couples) worth of charitable contributions, even if they took the standard deduction. That break won’t be available for tax year 2022.
What can you do now about a smaller refund?
Think of your tax bill like a report card, Farrington says. “The school year ended on December 31. Now you’re waiting for the results,” he says.
There is still time to earn some proverbial extra credit in the form of lowering your taxable income. If you have a health savings account, for instance, you have until Tax Day to make contributions that can be deducted from your 2022 income. For 2022, single payers could contribute up to $3,650, and families up to $7,300.
Owners of traditional IRA accounts can make a similar move. For 2022 you can stash up to $6,000 in one of these retirement accounts, which are funded with pre-tax dollars.
Contributing to one of these accounts can have multiple benefits, says Farrington: “You can lower your taxable income while also saving money for yourself.”
Even if lowering your bill isn’t in the cards, it’s worth being proactive about what you owe (or are owed). Once you have your tax documents together, prepare your return as early as possible. You won’t have to actually file until mid-April, but you can use the time in between to figure out where you stand.
If you’re not getting a refund you were counting on or if you owe an unexpected bill, finding out early will give you time to set savings aside to make up the shortfall.
