Tag: IRS

Millions of U.S. taxpayers could receive a shock when they see their 2023 tax refunds due to the expiration of many pandemic benefits that lawmakers had designed to help Americans weather the crisis. 

That means families may see smaller refunds when they file their taxes for the 2022 tax year, said Mark Steber, chief tax information officer at Jackson Hewitt. The average tax refund in 2022 (for the 2021 tax year) was almost $3,200, a 14% jump from the prior year, according to IRS data.

The IRS on Thursday said it will start accepting tax returns on January 23, while the filing deadline is April 18, giving taxpayers an extra three days beyond the typical April 15 deadline to file. That’s because April 15 falls on a Saturday, while Monday, April 17, is Emancipation Day in the District of Columbia.

The benefits that boosted refunds during the pandemic have largely lapsed, ranging from federal stimulus checks to the expanded Child Tax Credit (CTC), Steber noted. Even the IRS is warning taxpayers that checks may be stingier. The tax agency cautioned in a November news release: “Refunds may be smaller in 2023.” 

Many of the tax benefits still exist, but under current tax law they have reverted to their smaller, pre-pandemic levels, such as in the case of the CTC, which is credited with lifting millions of children out of poverty. The CTC is reverting to its prior level of $2,000 per child, compared with a pandemic credit that was high as $3,600 per kid.

The year 2021 “was quite a remarkable year with the insertion of all those new tax breaks,” Steber noted. “But jump ahead to [2022], and a lot of the increases expired, hence the term ‘refund shock’ or ‘refund surprise.’”

The typical tax refund this year could be around $2,700, or roughly what taxpayers got in 2021 (for their 2020 taxes), Steber said. Of course, each taxpayer’s situation is different, with refunds dependent on a number of factors, ranging from an individual’s tax bracket to whether a taxpayer has children. 

One rule of thumb recommended by Steber: Don’t look at your tax return from last year to determine what you’ll receive for your refund in 2023.

“You’re probably going to have not as pleasant an experience as you had last year,” he said. 

The IRS is also warning taxpayers that they shouldn’t bank on getting their refunds “by a certain date, especially when making major purchases or paying bills.”

It added, “Some returns may require additional review and may take longer.” 

Here are some of the tax changes that could impact your refund this year. 

No stimulus check

The government did not issue any stimulus checks in 2022, with the third and final payment authorized in the spring of 2021 through the American Rescue Plan Act. Because these checks were paid in 2021, they were reflected in tax returns filed in early 2022 and affected tax refunds received earlier this year. 

Some taxpayers relied on their 2021 tax filing to claim more stimulus money, which helped them get bigger refunds. For instance, children born in 2021 generally weren’t included in the third round of stimulus checks because the IRS was relying on 2020 tax returns to establish eligibility — and thus children born in 2021 were initially passed over by the tax agency. However, parents were able to claim the third stimulus check for these children when they filed their taxes last year. 

A smaller Child Tax Credit

The Child Tax Credit got supercharged in 2021, with parents of children under 6 receiving $3,600 and parents of children ages 6 to 17 getting $3,000. 

But in 2022, that tax credit reverted to its pre-pandemic level of $2,000 per child, regardless of age. While that’s certainly a help, that slimmer tax break could make an impact on parents’ refunds. 

Some lawmakers and child advocates are pushing to reinstate the higher CTC amounts, with Representative Adam Schiff, a Democrat from California, in December urging congressional leaders to extend the expanded CTC. But with Congress now divided, with Republicans controlling the House, it’s unlikely that the benefit would be returned to its expanded form.

The Child and Dependent Care Tax Credit

The Child and Dependent Care Credit, which helps parents pay for child care, was boosted under the American Rescue Plan, which raised the credit to up to $8,000 per family. 

But that tax credit has also reverted to its pre-pandemic level. Under the current law, parents can receive a credit on their 2022 taxes for up to 35% of up to $6,000 in qualifying child care expenses for two or more children. 

That means the maximum credit is $2,100 for the current year. (The amount is halved for parents of one child.)

Earned Income Tax Credit

Another tax credit that is less generous for 2022 tax filers is the Earned Income Tax Credit, or EITC, which is aimed at low- and moderate-income workers. 

During the pandemic, the EITC was increased for a group of workers who typically don’t benefit much from it: Adults without kids. In 2021, low-income workers without children were eligible to receive a credit worth up to $1,500. 

This year, the tax credit is reverting to a lower amount for this group — $560 in 2022. 

Low-income parents who qualify for the EITC will actually receive slightly higher amounts in 2022, as that figure is adjusted annually for inflation. For instance, eligible parents with two children can receive an EITC of $6,164 for their 2022 taxes, compared with $5,980 in 2021. 

No extra deduction for charitable giving

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, had a provision that allowed taxpayers to deduct an extra $300 for single taxpayers or $600 for married couples on their 2020 and 2021 taxes. 

This provision allowed people who rely on the standard deduction, which represents the majority of taxpayers, to take an extra deduction for charitable giving. But that above-the-line charitable deduction wasn’t renewed in 2022, which means that taxpayers who don’t itemize won’t get an extra deduction for their charitable gifts this year.

The IRS is gearing up for another tax season amid a slew of challenges, according to a new report. Most pressing is the need to upgrade its “antiquated” systems and hire more workers to provide better service, a watchdog group within the IRS found. Yet the agency’s leadership also faces another test: repelling the latest attacks by Republican lawmakers, some of whom are pushing to abolish it altogether.

For taxpayers, meanwhile, the main issues as ever are likely to be getting their refunds on time and reaching a human being at the IRS when they need help. And that, too, could prove difficult after three years of pandemic-induced delays and glitches, according to National Taxpayer Advocate Erin Collins, who this week released her annual report to Congress.

“During the last three years, we have lived through a period of ‘All COVID-19, all the time’ in tax administration, just as we have in our personal lives, communities and jobs,” she wrote. “These challenges continued to impact taxpayers significantly during 2022 and will carry over into 2023.”

“Sunlight” ahead?

But there is some good news as well, Collins said. For one, the IRS will start the current tax season with a smaller backlog than a year ago, although at 10 million unprocessed returns, the agency still has a considerable amount of catching up to do, her report says. 

“We have begun to see light at the end of the tunnel,” Collins wrote in the report. “I am just not sure how much further we need to travel before we see sunlight.”

Some relief may be in sight for taxpayers as the Inflation Reduction Act (IRA) last year directed $80 billion in new funding for the IRS to upgrade its technology and hire more workers, as well as to beef up enforcement against tax cheats. The idea is to improve IRS operations, while also sniffing out new revenue from wealthy taxpayers who skirt tax laws.

In an email, the IRS said it “will be carefully reviewing the annual report to Congress.”

It added, “While much work remains, the IRS is poised to deliver a better 2023 tax season for the nation with more services for taxpayers, helped by critically needed new resources provided by the Inflation Reduction Act.”

But that funding is now a target of GOP lawmakers, with House Republicans this week voting to rescind $72 billion of the $80 billion allocated to the IRS under the IRA.

On Tuesday, Rep. Earl L. “Buddy” Carter, a Republican from Georgia, introduced the Fair Tax Act, which would eliminate the federal personal and corporate income tax, the estate tax, and the payroll tax — the latter of which funds both Social Security and Medicare. Under his bill, those taxes would be replaced by a national consumption tax of 30% that would apply to all consumer purchases — health care, groceries, homes, gasoline and more. 

And because much of the tax code would be eliminated, the bill would also abolish the IRS. 

Real issues

To be sure, both bills have little hope of advancing given the Democrats’ control of the Senate. But the efforts speak to the long-term political headwinds facing the IRS, which could have greater ramifications for the agency if Republicans later gain control of Congress. 

Some Republican lawmakers continue to echo a claim that the $80 billion in new IRS funding would be used “to hire 87,000 new agents to target working families,” as Congressman Jason Smith, a Republican from Missouri who this week was selected as chairman of the powerful House Ways and Means Committee, said in a January 9 statement. 

Those claims have been dismissed by experts as misleading because much of the IRS’ new funding would be tapped to hire customer service agents and tax workers who could help answer questions and speed the agency’s handling of returns. New auditors would also be hired, but the Biden administration has said they would mostly focus their scrutiny on people earning $400,000 or more — not middle- or working-class Americans. 

In the meantime, the IRS is facing very real problems, although largely internal ones. The issues flagged by the National Taxpayer Advocate touch on the daily headaches currently facing taxpayers, such as delayed refunds, calls to the IRS that go unanswered, and a website that is confusing and difficult to use. 

Top 10 IRS problems

In the new report, the National Taxpayer Advocate outlined the 10 biggest problems at the IRS, all of which may impact taxpayers on a day-to-day basis. 

At the top of the list are processing delays, with millions of taxpayers seeing their returns caught in limbo. In some cases, the delays were due to the agency’s struggle to cope with paper returns, which must be manually entered into its computers. People who were victims of identity theft, meanwhile, had a typical delay of a full year to receive their refunds, Collins wrote.

These delays led to “widespread taxpayer frustration and both individual and business financial hardships for millions of taxpayers,” she noted. 

However, Collins said the IRA’s $80 billion in funding may help the agency upgrade its technology and reduce processing time. For instance, the bill directs $4.8 billion to modernize the agency’s IT systems, which could be used to buy scanning technology so that paper returns don’t have to be entered by hand.

Here are the top 10 problems, as outlined in Collins’ report:

1. Delays processing tax returns.
2. Tax code complexity: Collins said byzantine laws create a “costly and time-consuming” process for taxpayers.
3. IRS hiring and training: The IRS budget has shrunk by 15% in the last decade, leading to staffing levels last seen in the 1970s and creating declines in service quality.
4. Telephone and in-person service: Only 1 in 10 calls got through to an IRS agent in fiscal year 2021. 
5. Online access for taxpayers and tax professionals: Collins said the IRS websites lack functionality.
6. E-file and free file: The report notes that not all IRS forms are compatible with e-filing, which means some taxpayers are forced to file paper returns, leading to processing delays. 
7. IRS transparency: Collins dings the IRS for failing to provide taxpayers with basic information, such as why their refund was delayed.
8. Return preparer oversight: The report noted that taxpayers are frequently harmed by non-credentialed return preparers.
9. Appeals: Taxpayers who want the IRS Independent Office of Appeals to review their case have an average wait of a year.
10. Overseas taxpayers: Americans who live abroad face a number of hurdles to file their taxes, such as barriers for e-filing. 

“While much work remains, the IRS is poised to deliver a better 2023 tax season for the nation — with more services for taxpayers, helped by critically needed new resources provided by the Inflation Reduction Act,” the IRS told CBS MoneyWatch in an email.

Simplifying the tax code?

One thing Collins and anti-IRS lawmakers appear to agree on is that the nation’s tax code is overly complex. Its intricacy is one reason Rep. Carter argues a flat consumption tax would benefit Americans simply by whittling down the tax code. He also argues a flat tax would “encourage growth and innovation.”

However, tax experts have long pointed out that sales taxes eat away at the incomes of the poor and working class far more than the rich because lower-income households spend most of their paychecks on goods and services. The wealthy, meanwhile, spend a smaller share of their income, making it easier for them to sock away money in savings and investments. 

There could be other hidden costs, according to the left-leaning Institute on Taxation and Economic Policy. For instance, the consumption tax would eliminate the tax credits that many Americans receive when buying health insurance through the Affordable Care Act’s marketplaces. They would also face a new tax of 30% on their health insurance premiums, it noted. 

Republicans “are gearing up to vote on the so-called Fair Tax Act, which would eliminate the federal income tax and instead make everyone pay a flat 30% sales tax,” noted Frank Clemente, executive director of the tax advocacy group Americans for Tax Fairness, told CBS MoneyWatch. “So billionaires will pay the same share of taxes as working families.”

Millions of U.S. taxpayers are still waiting for their returns to be processed, with an already massive backlog at the IRS growing even larger in the past year, according to a new report from a government watchdog agency. 

The backlog of returns has swelled to 12.4 million returns still being processed as of September, an increase of 1.9 million returns from a year earlier, the Government Accountability Office found. As a result, millions of Americans have seen delays in getting their tax refunds, the agency noted.

The GAO’s findings come after three brutal tax filing seasons for many taxpayers, with millions of returns caught in limbo as the pandemic posed a series of challenges for the IRS. The tax agency has subsequently hired thousands of new employees in the hope of being better prepared for the 2023 tax filing season, although the IRS recently warned taxpayers not to bank on getting their refunds by any specific date when they file their returns in early 2023.

“The IRS cautions taxpayers not to rely on receiving a 2022 federal tax refund by a certain date, especially when making major purchases or paying bills,” the agency said in a November statement. “Some returns may require additional review and may take longer.”

In 2022, the average tax refund was about $3,100 — bigger than most people’s typical paycheck. Refund delays can put financial pressure on households that were banking on the money to pay down debt, start an emergency fund or make a big purchase.

The tax season typically opens in late January, although the IRS hasn’t yet announced the official start of the 2023 filing season. Many taxpayers plan on receiving their refund within 21 days — but the IRS’ warning last month signals that some Americans may need to wait longer.

Meanwhile, experts are warning taxpayers that their refunds may be smaller in 2023 due to the expiration of many pandemic tax benefits, such as the expanded Child Tax Credit and federal stimulus checks. 

The IRS didn’t immediately respond to a request for comment. 

Few phone calls answered

The GAO findings echo a report published earlier this year by the National Taxpayer Advocate, an independent watchdog within the IRS that in June found the agency faced an even bigger returns backlog for the 2022 tax season than it did the previous year. The delays created “unprecedented financial difficulties” for taxpayers, the NTA said. 

The IRS has received $80 billion in new funding through the Inflation Reduction Act, with about half of the money to be spent on upgrading technology and operations in an effort to avoid the kind of delays experienced in the last three years. The remaining funds will be spent on enforcement, such as hiring auditors who can go after tax cheats. 

Taxpayers struggled to get IRS employees on the phone in 2022, even though call volumes were lower than in 2021, the GAO report noted. 

“However, even with fewer taxpayers calling IRS for assistance, [customer service representatives] answered less than one out of five calls during the 2022 filing season,” the GAO noted. 

The attrition rate among the agency’s returns processing staff stood at about 16% in mid-June, more than double the IRS’ overall attrition rate, the GAO said. And about 1 in 5 new recruits leaves the agency within two or three years. 

“For every 10 newly hired returns processing staff, IRS needed about four additional staff to offset attrition,” the report noted. 

Millions of U.S. taxpayers could receive a tax refund shock when they file their 2022 returns due to the expiration of many pandemic benefits that lawmakers had designed to help Americans weather the crisis. 

That means families may see smaller refunds when they file their taxes in early 2023 for the current tax year, said Mark Steber, chief tax information officer at Jackson Hewitt. The average tax refund in 2022 (for the 2021 tax year) was almost $3,200, a 14% jump from the prior year, according to IRS data.

But the benefits that juiced refunds this year have largely lapsed, ranging from federal stimulus checks to the expanded Child Tax Credit (CTC), Steber noted. 

Even the IRS is warning taxpayers that checks may be stingier next year. The tax agency cautioned in a November news release: “Refunds may be smaller in 2023.”

Many of the tax benefits still exist, but under current tax law they have reverted to their smaller, pre-pandemic levels, such as in the case of the CTC, which is credited with lifting millions of children out of poverty. The CTC is reverting to its prior level of $2,000 per child, compared with a pandemic credit that was high as $3,600 per kid.

The year 2021 “was quite a remarkable year with the insertion of all those new tax breaks,” Steber noted. “But jump ahead to this year, and a lot of the increases expired, hence the term ‘refund shock’ or ‘refund surprise.’”

The typical tax refund next year could be around $2,700, or roughly what taxpayers got in 2021 (for their 2020 taxes), Steber said. Of course, each taxpayer’s situation is different, with refunds dependent on a number of factors, ranging from an individual’s tax bracket to whether a taxpayer has children. 

One rule of thumb recommended by Steber: Don’t look at your tax return from earlier this year to determine what you’ll receive for your refund in 2023.

“You’re probably going to have not as pleasant an experience as you had last year,” he said. 

The IRS is also warning taxpayers that they shouldn’t bank on getting their refunds “by a certain date, especially when making major purchases or paying bills.”

It added, “Some returns may require additional review and may take longer.” 

Still, taxpayers can take steps to improve their tax situation before year-end. For instance, you could sock away more dollars into a traditional IRA or 401(k) account to take advantaged of their pre-tax contribution rules — every dollar invested in one of these funds lowers your taxable income. 

And if you’ve suffered investment losses this year, consider selling one or more of those positions given that you can deduct up to $3,000 in losses against your earnings, lowering your taxable income. 

Here are some of the tax changes in 2022 that could impact your refund. 

No stimulus check

The government did not issue any stimulus checks issued in 2022, with the third and final payment authorized in the spring of 2021 through the American Rescue Plan Act. Because these checks were paid in 2021, they were reflected in tax returns filed in early 2022 and affected tax refunds received earlier this year. 

Some taxpayers relied on their 2021 tax filing to claim more stimulus money, which helped them get bigger refunds. For instance, children born in 2021 generally weren’t included in the third round of stimulus checks because the IRS was relying on 2020 tax returns to establish eligibility — and thus children born in 2021 were initially passed over by the tax agency. However, parents were able to claim the third stimulus check for these children when they filed their taxes earlier this year. 

A smaller Child Tax Credit

The Child Tax Credit got supercharged in 2021, with parents of children under 6 receiving $3,600 and parents of children ages 6 to 17 getting $3,000. 

But in 2022, that tax credit reverted to its pre-pandemic level of $2,000 per child, regardless of age. While that’s certainly a help, that slimmer tax break could make an impact on parents’ refunds. 

Some lawmakers and child advocates are pushing to reinstate the higher CTC amounts, with Representative Adam Schiff, a Democrat from California, this week urging congressional leaders to extend the expanded CTC. But with Congress leaving soon for its holiday recess, it’s unclear whether there will be any traction on this issue. 

The Child and Dependent Care Tax Credit

The Child and Dependent Care Credit, which helps parents pay for child care, was boosted under the American Rescue Plan, which raised the credit to up to $8,000 per family. 

But that tax credit has also reverted to its pre-pandemic level. Under the current law, parents can receive a credit on their 2022 taxes for up to 35% of up to $6,000 in qualifying child care expenses for two or more children. That means the maximum credit is $2,100 for the current year. (The amount is halved for parents of one child.)

Earned Income Tax Credit

Another tax credit that is less generous this year is the Earned Income Tax Credit, or EITC, which is aimed at low- and moderate-income workers. 

During the pandemic, the EITC was increased for a group of workers who typically don’t benefit much from it: Adults without kids. In 2021, low-income workers without children were eligible to receive a credit worth up to $1,500. 

This year, the tax credit is reverting to a lower amount for this group — $560 in 2022. 

Low-income parents who qualify for the EITC will actually receive slightly higher amounts in 2022, as that figure is adjusted annually for inflation. For instance, this year eligible parents with two children can receive an EITC of $6,164, compared with $5,980 in 2021. 

No extra deduction for charitable giving

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, had a provision that allowed taxpayers to deduct an extra $300 for single taxpayers or $600 for married couples on their 2020 and 2021 taxes. 

This provision allowed people who rely on the standard deduction, which represents the majority of taxpayers, to take an extra deduction for charitable giving. But that above-the-line charitable deduction wasn’t renewed in 2022, which means that taxpayers who don’t itemize won’t get an extra deduction for their charitable gifts this year.

Millions of U.S. taxpayers could face a tax refund shock when they file their 2022 returns because of the expiration of many pandemic benefits that lawmakers had designed to help Americans weather the crisis. 

That means families may see smaller refunds when they file their taxes in early 2023 for the current tax year, said Mark Steber, chief tax information officer at Jackson Hewitt. The average tax refund in 2022 (for the 2021 tax year) was almost $3,200, a 14% jump from the prior year, according to IRS data.

But the benefits that juiced refunds this year have largely lapsed, ranging from federal stimulus checks to the expanded Child Tax Credit (CTC), Steber noted. 

Many of the tax benefits still exist, but under current tax law they have reverted to their smaller, pre-pandemic levels, such as in the case of the CTC, which is credited with lifting millions of children out of poverty. The CTC is reverting to its prior level of $2,000 per child, compared with a pandemic credit that was high as $3,600 per kid.

The year 2021 “was quite a remarkable year with the insertion of all those new tax breaks,” Steber noted. “But jump ahead to this year, and a lot of the increases expired, hence the term ‘refund shock’ or ‘refund surprise.’”

The typical tax refund next year is likely to be around $2,700, or roughly what taxpayers got in 2021 (for their 2020 taxes), Steber said. Of course, each taxpayer’s situation is different, with refunds dependent on a number of factors, ranging from an individual’s tax bracket to whether a taxpayer has children. 

One rule of thumb recommended by Steber: Don’t look at your tax return from earlier this year to determine what you’ll receive for your refund in 2023.

“You’re probably going to have not as pleasant an experience as you had last year,” he said. 

Still, taxpayers can take steps to improve their tax situation before year-end. For instance, you could sock away more dollars into a traditional IRA or 401(k) account to take advantaged of their pre-tax contribution rules — every dollar invested in one of these funds lowers your taxable income. 

And if you’ve suffered investment losses this year, consider selling one or more of those positions given that you can deduct up to $3,000 in losses against your earnings, lowering your taxable income. 

Here are some of the tax changes in 2022 that could impact your refund. 

No stimulus check

The government did not issue any stimulus checks issued in 2022, with the third and final payment authorized in the spring of 2021 through the American Rescue Plan Act. Because these checks were paid in 2021, they were reflected in tax returns filed in early 2022 and affected tax refunds received earlier this year. 

Some taxpayers relied on their 2021 tax filing to claim more stimulus money, which helped them get bigger refunds. For instance, children born in 2021 generally weren’t included in the third round of stimulus checks because the IRS was relying on 2020 tax returns to establish eligibility — and thus children born in 2021 were initially passed over by the tax agency. However, parents were able to claim the third stimulus check for these children when they filed their taxes earlier this year. 

A smaller Child Tax Credit

The Child Tax Credit got supercharged in 2021, with parents of children under 6 receiving $3,600 and parents of children ages 6 to 17 getting $3,000. 

But in 2022, that tax credit reverted to its pre-pandemic level of $2,000 per child, regardless of age. While that’s certainly a help, that slimmer tax break could make an impact on parents’ refunds. 

Some lawmakers and child advocates are pushing to reinstate the higher CTC amounts, with Representative Adam Schiff, a Democrat from California, this week urging congressional leaders to extend the expanded CTC. But with Congress leaving soon for its holiday recess, it’s unclear whether there will be any traction on this issue. 

The Child and Dependent Care Tax Credit

The Child and Dependent Care Credit, which helps parents pay for child care, was boosted under the American Rescue Plan, which raised the credit to up to $8,000 per family. 

But that tax credit has also reverted to its pre-pandemic level. Under the current law, parents can receive a credit on their 2022 taxes for up to 35% of up to $6,000 in qualifying child care expenses for two or more children. That means the maximum credit is $2,100 for the current year. (The amount is halved for parents of one child.)

Earned Income Tax Credit

Another tax credit that is less generous this year is the Earned Income Tax Credit, or EITC, which is aimed at low- and moderate-income workers. 

During the pandemic, the EITC was increased for a group of workers who typically don’t benefit much from it: Adults without kids. In 2021, low-income workers without children were eligible to receive a credit worth up to $1,500. 

This year, the tax credit is reverting to a lower amount for this group — $560 in 2022. 

Low-income parents who qualify for the EITC will actually receive slightly higher amounts in 2022, as that figure is adjusted annually for inflation. For instance, this year eligible parents with two children can receive an EITC of $6,164, compared with $5,980 in 2021. 

No extra deduction for charitable giving

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, had a provision that allowed taxpayers to deduct an extra $300 for single taxpayers or $600 for married couples on their 2020 and 2021 taxes. 

This provision allowed people who rely on the standard deduction, which represents the majority of taxpayers, to take an extra deduction for charitable giving. But that above-the-line charitable deduction wasn’t renewed in 2022, which means that taxpayers who don’t itemize won’t get an extra deduction for their charitable gifts this year.

Millions of U.S. taxpayers could face a tax refund shock when they file their 2022 returns because of the expiration of many pandemic benefits that lawmakers had designed to help Americans weather the crisis. 

That means families may see smaller refunds when they file their taxes in early 2023 for the current tax year, said Mark Steber, chief tax information officer at Jackson Hewitt. The average tax refund in 2022 (for the 2021 tax year) was almost $3,200, a 14% jump from the prior year, according to IRS data.

But the benefits that juiced refunds this year have largely lapsed, ranging from federal stimulus checks to the expanded Child Tax Credit (CTC), Steber noted. 

Many of the tax benefits still exist, but under current tax law they have reverted to their smaller, pre-pandemic levels, such as in the case of the CTC, which is credited with lifting millions of children out of poverty. The CTC is reverting to its prior level of $2,000 per child, compared with a pandemic credit that was high as $3,600 per kid.

The year 2021 “was quite a remarkable year with the insertion of all those new tax breaks,” Steber noted. “But jump ahead to this year, and a lot of the increases expired, hence the term ‘refund shock’ or ‘refund surprise.’”

The typical tax refund next year is likely to be around $2,700, or roughly what taxpayers got in 2021 (for their 2020 taxes), Steber said. Of course, each taxpayer’s situation is different, with refunds dependent on a number of factors, ranging from an individual’s tax bracket to whether a taxpayer has children. 

One rule of thumb recommended by Steber: Don’t look at your tax return from earlier this year to determine what you’ll receive for your refund in 2023.

“You’re probably going to have not as pleasant an experience as you had last year,” he said. 

Still, taxpayers can take steps to improve their tax situation before year-end. For instance, you could sock away more dollars into a traditional IRA or 401(k) account to take advantaged of their pre-tax contribution rules — every dollar invested in one of these funds lowers your taxable income. 

And if you’ve suffered investment losses this year, consider selling one or more of those positions given that you can deduct up to $3,000 in losses against your earnings, lowering your taxable income. 

Here are some of the tax changes in 2022 that could impact your refund. 

No stimulus check

The government did not issue any stimulus checks issued in 2022, with the third and final payment authorized in the spring of 2021 through the American Rescue Plan Act. Because these checks were paid in 2021, they were reflected in tax returns filed in early 2022 and affected tax refunds received earlier this year. 

Some taxpayers relied on their 2021 tax filing to claim more stimulus money, which helped them get bigger refunds. For instance, children born in 2021 generally weren’t included in the third round of stimulus checks because the IRS was relying on 2020 tax returns to establish eligibility — and thus children born in 2021 were initially passed over by the tax agency. However, parents were able to claim the third stimulus check for these children when they filed their taxes earlier this year. 

A smaller Child Tax Credit

The Child Tax Credit got supercharged in 2021, with parents of children under 6 receiving $3,600 and parents of children ages 6 to 17 getting $3,000. 

But in 2022, that tax credit reverted to its pre-pandemic level of $2,000 per child, regardless of age. While that’s certainly a help, that slimmer tax break could make an impact on parents’ refunds. 

Some lawmakers and child advocates are pushing to reinstate the higher CTC amounts, with Representative Adam Schiff, a Democrat from California, this week urging congressional leaders to extend the expanded CTC. But with Congress leaving soon for its holiday recess, it’s unclear whether there will be any traction on this issue. 

The Child and Dependent Care Tax Credit

The Child and Dependent Care Credit, which helps parents pay for child care, was boosted under the American Rescue Plan, which raised the credit to up to $8,000 per family. 

But that tax credit has also reverted to its pre-pandemic level. Under the current law, parents can receive a credit on their 2022 taxes for up to 35% of up to $6,000 in qualifying child care expenses for two or more children. That means the maximum credit is $2,100 for the current year. (The amount is halved for parents of one child.)

Earned Income Tax Credit

Another tax credit that is less generous this year is the Earned Income Tax Credit, or EITC, which is aimed at low- and moderate-income workers. 

During the pandemic, the EITC was increased for a group of workers who typically don’t benefit much from it: Adults without kids. In 2021, low-income workers without children were eligible to receive a credit worth up to $1,500. 

This year, the tax credit is reverting to a lower amount for this group — $560 in 2022. 

Low-income parents who qualify for the EITC will actually receive slightly higher amounts in 2022, as that figure is adjusted annually for inflation. For instance, this year eligible parents with two children can receive an EITC of $6,164, compared with $5,980 in 2021. 

The IRS said it is adjusting many of its rules to account for the impact of inflation, ranging from individual income tax brackets for 2023 to the standard deduction. The changes could mean tax savings for some taxpayers next year.

The higher limits are aimed at avoiding “bracket creep” due to inflation, which can push workers who received annual cost-of-living pay increases into higher tax brackets even though their standard of living hasn’t changed. 

The IRS makes such adjustments annually, but this year’s hot inflation means that many of the changes are more significant than in a typical year. Americans are struggling with stubbornly high inflation, which is eating into their purchasing power as average wage gains lag the sharp rise in prices.

The higher provision thresholds could provide relief to some taxpayers who fall into lower tax brackets as a result, said Tim Steffen, director of tax planning with Baird, in an email. For instance, Steffen noted that a married couple earning $200,000 in both 2022 and 2023 would save $900 in taxes next year because more of their income would be taxed at a lower rate.

Here are the changes announced by the IRS on October 18, with the inflation-adjusted provisions taking effect for the 2023 tax year. Taxpayers will file their 2023 tax returns in early 2024. 

Standard deduction

The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on. 

• For married couples filing jointly, the standard deduction will rise to $27,700, up from $25,900 in the current tax year. That’s an increase of $1,800, or a 7% bump. 
• For single taxpayers and married individuals filing separately, the standard deduction will rise to $13,850 in 2023 from $12,950 currently. That’s an increase of about 6.9%.
• Heads of households will see their standard deduction in 2023 jump to $20,800 from $19,400 this year. That’s an increase of 7.2%. 

“The flip side of this, though, is that it’s going to be harder to itemize your deductions in 2023,” Steffen said. “That means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit next year.”

Most taxpayers take the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction. Only about 14% of taxpayers itemized their taxes after the passage of the tax overhaul, or a 17 percentage-point drop compared with prior to the law, according to the Tax Foundation.

Tax brackets

The IRS is boosting tax brackets by about 7% for each type of tax filer, such as those filing separately or as married couples. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above $578,125 or for married couples with income higher than $693,750. 

The lowest rate remains 10%, which will impact individuals with incomes of $11,000 or less and married couples earning $22,000 or less. Below are charts with the new tax brackets.

Tax brackets show the percentage you’ll pay in taxes on each portion of your income. A common misconception is that the highest rate is what you’ll pay on all of your income, but that is incorrect. 

Take a single taxpayer who earns $110,000. In 2023, she will take a standard deduction of $13,850, reducing her taxable income to $96,150. She’ll pay:

• 10% tax on her first $11,000 of income, or $1,100 in taxes
• 12% tax on income from $11,000 to $44,735, or $4,048
• 22% tax on the portion of income from $44,735 up to $95,375, or $11,140
• 24% tax on the portion of her income from $95,374 to her limit of taxable income, $96,150, or $775

Together, she’ll pay the IRS $17,063 in taxes, which gives her an effective tax rate of 17.7% on her taxable income. 

Flexible spending accounts

Flexible spending accounts allow workers to put money, up to the limit allowed by the IRS, in an account that can be used to pay for medical expenses. Because the funds are taken from their accounts on a pre-tax basis, it offers tax savings for many workers. 

The new IRS limit for FSA contributions for 2023 is $3,050, an increase of about 7% from the current tax year’s threshold of $2,850. 

Because employees set their FSA limits in the fall, ahead of the new calendar year, people will be using this new IRS threshold to decide on their contributions within the next few weeks.

Earned Income Tax Credit

The maximum amount for households who claim the Earned Income Tax Credit will be $7,430 for those who have at least three children, compared with $6,935 in the current tax year, the IRS said.

Capital gains tax brackets

Capital gains — the profit from investments or other assets — are taxed using different brackets and rates than earned income. The income thresholds for capital gains taxes are also being adjusted due to inflation, the IRS said. 

For instance, in 2022 single taxpayers who earn below $41,675 aren’t required to pay capital gains taxes on their investments. That threshold will rise about 7% to $44,625 in 2023. Single taxpayers who earn above that amount are subject to a 15% capital gains tax, while those who earn above $492,300 in 2023 will be subject to the top capital gains rate of 20%.

Bigger gift exclusion

People can also give up to $17,000 in gifts in 2023 without paying taxes on the money, up from $16,000 in the current year.

Estate tax limit

The estates of wealthy Americans will also get a bigger break in 2023. The IRS will exempt up to $12.92 million from the estate tax, up from $12.06 million for people who died in 2022 — an increase of 7.1%.