The confetti’s cleared and the champagne glasses are long drained, but Americans hoping to continue the celebrations through to tax time might want to start tempering their expectations.
“Refunds may be smaller in 2023,” the IRS noted in a November news release about preparing for the upcoming tax season.
While it may be disappointing that 2023 won’t herald in a hefty tax return for many households, here’s more on why that is and what else you need to know before this year’s filing season begins on Jan. 24.
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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 for the 2022 filing season 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.
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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. But 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
The important thing to understand 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.
The exception, of course, is when you can claim a refundable tax credit on things like heat pumps or child care.
But you’re likely not a lender, so why would you want to give the revenue agency interest-free loans throughout the year? That extra cash could go toward your financial goals instead, whether that’s paying down debt, building up an emergency fund or saving for retirement.
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.
Source: https://finance.yahoo.com/news/irs-just-warned-tax-refund-153000149.html