The IRS began accepting returns on Jan. 23, 2023, extending the deadline to April 18, 2023, giving taxpayers a few more days to file. The reasoning was that the 15th is a Saturday, and Monday, April 17, 2023, is Emancipation Day — a holiday in the District of Columbia. Many of the boosts that garner more significant taxpayer returns have expired, from the increased Child Tax Credit to the stimulus checks the federal government issued. The IRS has warned that taxpayers should expect smaller checks this year, stating, “Refunds may be smaller in 2023,” in a November news release.
Most of these benefits are still there, but with current tax law, they have returned to pre-pandemic levels, which were lower — significantly so in some cases. An excellent example of this is Child Tax Credit. Before the pandemic, Child Tax Credit offered a payment of $2,000 per child. Once the pandemic hit, the government increased Child Tax Credit to $3,600, significantly impacting tax returns. With all the new tax breaks, 2021 was a remarkable year for taxpayers, who saw significant increases in their tax returns. With the expiry of these tax breaks, returns will now “fall back to earth,” leading to tax refund shock.
Tax returns this tax year are estimated to average about $2,700, roughly the same as 2021 levels. This is a macro view, taking the average of all tax returns, so everyone’s situation will differ. The impact you’ll see will vary according to your specific circumstances, such as the number of dependents you have, along with your tax bracket.
Importantly, do not use last year’s tax return to estimate this year’s return, as you may experience tax refund shock. Additionally, returns may take longer to process, so don’t anticipate receiving your refund by a specific date and spend it ahead of time, especially for bills or a significant purchase.
Several factors are contributing to this year’s tax refund shock, reducing the total refund amount taxpayers will receive this tax season, including:
The government issued three stimulus checks during the pandemic, with the last authorized in mid-2021 via the American Rescue Plan Act. None were issued in 2022. Some received more stimulus money, which led to bigger tax refunds with the 2021 tax year filing. For example, if a taxpayer had a child in 2021, they were not included in the last round of stimulus checks because the IRS used the 2020 tax returns to determine eligibility, leading to those newborns being passed over. However, they could claim the third check when they filed taxes last year.
In 2021, the government increased Child Tax Credit significantly to help with hardship associated with the pandemic. The credit was $3,600 for children aged 5 and younger and $3,000 for children aged 6 to 17. For 2022, Child Tax Credit was reduced to its pre-pandemic amount — $2,000 for children of any age — still a help, but a substantial decrease from the previous year. Lawmakers and child advocates, particularly the Democrats in Congress, have discussed pushing for the reinstatement of higher Child Tax Credit amounts. However, now that Republicans have control of the House, this is highly unlikely.
Another helpful tax credit for parents is the Child and Dependent Care Credit, which provides funds for parents to pay for caring for their children. The credit increased from $6,000 to $8,000 per family under the American Rescue Plan. Typically, this credit directly reflects how much parents will get back in their tax refund.
With the Child and Dependent Care Credit dropping back to $6,000, lower-income families will receive $2,000 less on their tax returns. Current tax law indicates that parents can get a credit for 2022 taxes for 35% of their qualifying childcare expenses up to $6,000 for two or more children.
This credit is specifically for lower-income families, as income limits do apply. Earned Income Tax Credit (EITC) is also dramatically reduced for the 2022 tax year. The government increased EITC for those who don’t usually get any benefit from it — childless adults. That changed for 2021, as low-income taxpayers who did not have children could still receive up to $1,500 in EITC. There is still an EITC for adults without children in 2022, but it is reduced from $1,500 to $560.
There’s some good news for low-income families who qualify for EITC, as their credit amount will increase slightly because it’s adjusted yearly for inflation. In 2021, qualifying parents with two kids received an EITC of $5,980. For 2022, that amount goes up to $6,164 — not a significant difference, but at least not dropping as much as other tax breaks.
A provision that gave an extra deduction of $300 for single taxpayers and $600 for married taxpayers, called the Coronavirus Aid, Relief and Economic Security Act, was enacted for 2020 and 2021. This deduction allowed those who use the standard deduction, which the vast majority of taxpayers do, to deduct for giving to charitable organizations. This charitable deduction does not remain in effect for 2022, meaning unless you itemize deductions, you’ll not receive any tax reduction for charitable contributions.
If you’d like help with your taxes, contact the knowledgeable team at Pasquesi Sheppard. We offer tax preparation services, as well as financial planning and bookkeeping services. Contact us at 847-234-5000 or complete our secure online form to get started today.