2023 Tax Season

 Many taxpayers will receive smaller refunds when they file their tax returns for tax year 2022, due to Congress not extending the tax breaks put in place during the height of the Covid-19 pandemic as part of its year-end budget bill, as stated by tax preparers. Some taxpayers who received refunds in recent years may now have a balance due. The amount of the refund will depend on the taxpayers' situation, including whether they adjusted the amount they asked their employer to withhold in taxes and whether they paid estimated taxes. The average individual tax refund last year was $3,176, up 14% from $2,791 in the 2021 tax season.

The federal economic impact payments is one of the main reasons why taxpayers may see a decrease in their refunds this year. Most taxpayers received their 2021 stimulus checks automatically, but some got the money as a recovery rebate credit of $1,400 per person on their 2021 income tax return. For a family of four, that could have meant a $5,600 credit on their 2021 taxes that won’t be on this year’s return. This means that for many taxpayers, the stimulus check they received last year will be counted as income on their tax return this year, which could result in a smaller refund or a balance due.

Another reason why refunds may be smaller this year is due to state rebates/refunds. More than a dozen states issued taxpayers rebates and refunds in 2022. Although these payments won’t count as taxable income on state returns, they often will count as taxable income on federal returns. For example, California has sent tens of millions of taxpayers payments ranging from $200 to $1,050. The IRS may count these payments as income on federal returns, which could result in a higher tax bill.

The nonitemizer charitable deduction, child tax credit, and child and dependent care tax breaks are also changes that could raise the tax bill and potentially shrink the refund this year. The nonitemizer charitable deduction is a temporary tax break that allowed a special charitable deduction for taxpayers who take the standard deduction instead of itemizing. The $300 deduction individuals could take, or $600 for married couples, wasn’t available for tax year 2022 and could mean a small increase in tax bills. The child tax credit has reverted to $2,000 for children under age 17, which is a big drop from the enhanced child tax credit for 2021 of $3,000 for children under age 18 and $3,600 for children under age 6. The tax credit for child and dependent care expenses also went back to the old limit of $2,100 for 2022, which could result in a lower refund.

It's important for taxpayers to be aware of these changes, and to update their W4 form so that their employer will withhold more in taxes. Taxpayers should also pay attention to their investment gains and losses and make sure that they are not overpaying or underpaying in taxes. It's always a good idea to consult a tax professional to help you navigate these changes and ensure that you are getting the best refund possible.

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