If you're like most Americans, you're eagerly awaiting your tax refund this year. But, unfortunately, you may be in for a rude awakening. Due to several complicated changes to the tax code, your refund could be significantly smaller than you were expecting it to be. Here's what you need to know about the "new" tax law and how it could impact your refund.
The average tax refund is expected to be lower this year
This year, the average tax refund may look a bit different. The average tax refund for Tax Year 2022 (filed in the Spring of 2023) is expected to be lower than usual due to several factors. Last year (Tax Year 2021) average tax refunds were up considerably. This year is really just a return to the status quo as COVID-related tax breaks expire and certain provisions from the 2017 Tax Cuts and Jobs Act "sunset." Essentially, there were temporary tax breaks that start to expire this year.
Refunds are typically created in two ways: first, you had more tax withheld than you needed to; secondly, you have tax credits that decrease your tax liability. This confuses many taxpayers, after all, shouldn't the IRS know how much tax I should pay already? The answer: sort of.
The IRS takes their best guess when they withhold from your check, but any number of things could cause the IRS's guess to be incorrect. For starters, you fill out a form W-4 when you start work. This form tells the IRS how to guess at how much tax to withhold. Incorrect answers can cause a problem that has to be corrected when you file your tax return. Additionally, you may qualify for various deductions and credits that the IRS doesn't know you qualify for. If you're self-employed, there's even more nuance here.
Here's how you need to think about the tax filing process: you pay the tax throughout the year, and you double-check the IRS with your final tax return, correcting any errors in assumptions (here the old adage, "your fair share and not a penny more" is fairly accurate).
There are still ways to maximize your return and get the most out of it, though! Be sure to claim any eligible deductions or credits you may have, and take advantage of free resources available to Taxpayers. For those who prepare their own taxes, I recommend using 1040.com. 1040.com doesn't nickel and dime you like other self-preparation software and is made by the same company that I buy my professional tax software from. With a little care and attention to detail this season, you can still make the most out of your taxes!
Reasons why your tax refund might be lower than usual
Your income went up, and you got pushed into a higher tax bracket. This typically happens when you have sources of income that aren't subject to withholding (interest, dividends, social security, businesses).
You were required to pay estimates but didn't. Some taxpayers have to pay in tax on income that isn't subject to withholding. If you don't know what I'm talking about, it probably doesn't apply to you. But, if your accountant told you to pay and you didn't, don't be surprised if you owe.
You took a charitable deduction last year with the standard deduction. There was a small COVID deduction for charitable contributions, even for taxpayers who take the standard deduction. That has expired for Tax Year 2022.
The child tax credit is back to the "normal" amount. Last year it was either $3,000 or $3,600, per child depending on the age of your child. This year, the maximum is $2,000.
You claimed a credit for stimulus funds you were eligible for but didn't receive. For Tax Year 2021, you could take the "Recovery Rebate Credit" to claim stimulus you did not receive. You cannot do so on 2022 tax returns.
What you can do with a smaller tax refund
Did you get a smaller-than-expected tax refund this year? Don't let it discourage you! There are plenty of smart ways to put your refund to good use. You can start an emergency fund for unexpected expenses; make an extra mortgage payment or contribute more to your retirement account; buy something special you've been wanting; or pay off any debt you may have.
Any of these choices will help prepare you financially for the future. A smaller tax refund isn't the end of the world - it might just be the beginning of a better financial relationship with yourself!
How to make the most of your tax refund
If you're lucky enough to receive a tax refund this year, don't waste it! Investing that money can help give your finances an extra boost. Consider using the refund towards building an emergency fund, paying any remaining debts you have, or investing in tax-advantaged retirement accounts. Maximizing the value of your tax return will help place you closer to having a secure financial future. For many people, getting and using their tax refund strategically is one of the best things they can do for their overall financial health.
Tips for next year's tax return
As tax season approaches and you start to crunch the numbers, it's essential to keep yourself organized. To make sure there are no surprises during tax time, create a filing system for your paperwork or use a tax software solution to track everything. Making a checklist of items that can potentially reduce your taxes, like medical expenses and charitable donations, will help you maximize tax savings. Additionally, it pays to know exactly how long records should be kept on hand—typically three to seven years—so that you can locate documents quickly if needed and dispose of expired documents in a secure manner. With these tips and good planning, you'll make next year's return as smooth sailing as possible.
Now that you know why your tax refund might be lower than usual and what you can do about it, you’re in a good position to maximize the money you do get back. Remember these tips when filing your taxes next year so you can avoid any surprises. And if you need help with tax planning or filing, we’re here for you.
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