Many financial advisers question the wisdom of getting big income tax refunds. But that’s a discussion for another day. If you’ve been getting federal refunds year after year, you’re probably expecting that to continue when you fill out your 2022 tax forms. Perhaps you’ve even budgeted for it.
However, you may be in for an unpleasant surprise.
“Unfortunately for many tax filers, this year’s refund will yield a significantly smaller cash inflow than the previous two years,” said Daniel Colston. CEO of Upward Financial Planning in Roanoke, Virginia. “This decrease in refunds for taxpayers across the board is due to a few different factors.”
That’s not very stimulating news. Speaking of which …
The Pandemic Stimulus Era Is Over
“During 2020 and 2021, refunds were propped up by various COVID relief programs including temporary expansion to donations on charitable giving and the widely known stimulus checks,” Colston said. “In 2022, these rebates/tax breaks phased out and will not be reflected on people’s tax returns this year, unfortunately.”
Some of those programs affected almost everybody. Others were more targeted.
In 2021, the stimulus payments many Americans received came in the form of a credit – $1,400 for individuals, $2,800 for those filing jointly with a spouse – that that could be applied to their income taxes. That raised refunds or prevented many taxpayers from having to write a check when they filed their returns. That wasn’t repeated in 2022.
Enhanced Child Credits
Pandemic legislation allowed parents with two children under age 6 a combined $7,200 in tax credits in 2021. Now, such a family will have just $4,000 in credits. That $3,200 difference will burst a lot of refund balloons.
Most years, taxpayers must itemize deductions if they want to deduct donations to charity. The only other option is to take a standard deduction. In 2021, a special tax break allowed individuals who took the standard deduction to take an additional $300 deduction for gifts to charity – $600 for married couples filing jointly. That deduction wasn’t extended for 2022.
Mutual Fund Mayhem
2022 was, to say the least, a volatile year in the stock market, which led many mutual funds to sell even some of their profitable holdings. Those who hold such funds in a tax-sheltered account will be fine, but if you hold such funds directly, you’ll owe taxes on the capital gains.
Layoffs and Unemployment
“In 2022, there were significant layoffs and a new influx of population that filed for unemployment benefits,” Colston said. “While it is beneficial that this portion of the population was able to have coverage while they were searching for a new job, it is possible they did not have enough taxes withheld from their unemployment benefits. This lack of withholding, unfortunately, results in a larger tax bill come filing season.”
What About Next Year?
If getting a refund is your goal, Miles Brooks, director of tax strategy at CoinLedger, which helps people file cryptocurrency taxes, has a five-step strategy.
- If you’re married, file jointly to save money.
- Don’t overlook dependent care expenses. Up to $2,000 in child tax credits can be claimed by taxpayers with children younger than 17. Daycare, summer day camps, sports camps, and school programs are among the other qualifying expenses.
- See whether itemizing deductions will work better than the standard deduction.
- Contribute to a traditional IRA to saving money on taxes. Maximizing tax refunds is a good way to contribute to the pre-tax accounts.
- Claim credit for energy-efficient home improvements. Provisions in the Inflation Reduction Act of 2022 allow taxpayers to claim credits for home improvements on energy efficiency.
George Morris writes about debt relief options and bankruptcy topics for Debt.org. In his 40-plus-year newspaper career, George has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association.
- Dore, K. (2022, December 1) Tax ‘refunds may be smaller in 2023,’ warns IRS. Here’s why. Retrieved from https://www.cnbc.com/2022/12/01/heres-why-your-tax-refund-may-be-smaller-in-2023-the-irs-says.html
- Chappell, B. (2023, January 22) Your tax refund will likely be smaller this year. Here are more things to know. Retrieved from https://www.npr.org/2023/01/22/1150300686/tax-refund-irs