Many families could see drastically smaller tax refunds in 2023: Here’s why

Family budgets could be even more stretched in 2023 as we battle high, inflation-fueled prices; rising interest rates; growing fears of a recession and job cuts, and watch some COVID-19-related stimulus breaks disappear on 2022 federal income tax returns.

A long list of temporary tax breaks were designed to shore up and even boost household wealth during the pandemic. But taxpayers won't see many of those same generous benefits on the 2022 tax return, as there's more of a return to normal if you will for some key tax breaks.

Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said it's hard to say how much smaller federal income tax refunds could be for some households but the amount will be sizable for many.

"I don't have any magic number to suggest," Luscombe said.

The average tax refund was $3,176 in 2022, up 13.8% from the average refund last year, according to the most recent filing statistics data from the Internal Revenue Service through the week ending Oct. 28. The average refund was $2,791 in 2021.

To be sure, how much you pay in taxes — or the size of any refund — depends a great deal on a long list of factors, including how much money you've made during the year, how much you've had withheld for taxes from your paychecks and what kind of tax breaks apply to your return.

The average tax refund was $3,176 in 2022, up 13.8% from the average refund last year, according to the most recent filing statistics data from the Internal Revenue Service through the week ending Oct. 28. The average refund was $2,791 in 2021.
The average tax refund was $3,176 in 2022, up 13.8% from the average refund last year, according to the most recent filing statistics data from the Internal Revenue Service through the week ending Oct. 28. The average refund was $2,791 in 2021.

The notion that refunds overall will be smaller in 2022 isn't one size fits all. It's a risk that some, but not all, taxpayers face.

Many taxpayers should prepare to see drastically smaller refunds when they file returns next year if they benefited last year from the expanded child tax credit, the dependent care credit or received a stimulus payment for a child born in 2021, said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

The refund shock for 2022 returns could turn into a "super shock," he said, for taxpayers who benefited from two or three sizable credits on their 2021 tax return that are no longer available or aren't as large as last year.

Consider someone who had a baby in 2021 and got an extra stimulus payment of $1,400 on the 2021 return — and then qualified for a $3,600 child tax credit and got another tax break with extra money for dependent care for child care costs when the parent was at work, he said.

"There were larger, enhanced tax credits available last year that aren’t available this year," Steber said.

Some taxpayers might owe the IRS when they file a return in 2023 instead of receiving a refund.

Don't expect big tax breaks related to child care

One huge change on the 2022 return applies to those who pay for child care or dependent care so that they can work or look for work. The child and dependent care credit falls back to a maximum of $2,100 on the 2022 tax return instead of a substantially more generous $8,000 for 2021. If you paid for child care, for example, those who qualified based on income could have received up to $4,000 in 2021 for day care expenses for one child or up to $8,000 for expenses relating to two or more children. Income limits apply to receive the credit.

More:Ann Arbor man wonders about $933 IRS said he was owed

The American Rescue Plan in 2021 greatly expanded the child and dependent care credit for 2021 only — but the amount of that credit generally returns to 2020 levels for 2022.

Age limits will stop many from getting a tax break

Older adults who are working in lower wage jobs face a smaller tax refund when they file their 2022 returns, if they took advantage of a one-year tax break in 2021 relating to the earned income tax credit. Last year, the credit was worth nearly $1,500 for those without children who qualified.

The earned income tax credit remains in place in 2022. But eligible taxpayers with no children who received roughly $1,500 for the earned income tax credit for 2021 will now get up to $560 for 2022. The maximum earned income tax credit for those with three or more qualifying children is $6,935 for 2022.

Currently, workers who are age 65 and older no longer qualify for the earned income tax credit if they do not have dependent children. The credit only applied to that group for one year on 2021 returns. This year, they would not even qualify for the lower $560 credit for 2022.

Advocates, including the AARP, want Congress to permanently eliminate the age cap for the earned income tax credit. "More Americans, either by necessity or choice, are remaining in the workplace into their late sixties and beyond," according to a letter sent in early December by the AARP to House and Senate leadership.

Almost half of workers born between 1946 and 1960 expect to work past age 70 or do not plan to retire at all, the letter noted. "Yet, simply by turning 65, many of these workers are excluded from this important EITC benefit."

Cristina Martin Firvida, vice president of government affairs at AARP, told the Detroit Free Press that more than 2 million workers age 65 and older are not eligible for the earned income tax credit because of the age cap.

Many might view this as age discrimination since a younger worker who is earning the same pay on the same type of job would qualify for a tax break but an older worker, say someone who is 66 or 70, would not qualify.

"And that is age discrimination, plain and simple," she said.

"Two people doing the same work for the same wages should be eligible for the same tax credit that helps stretch the dollars that they earn," Martin Firvida said.

We're also living at a time of labor shortages that some say contribute to higher prices and inflation. Federal Reserve Chair Jerome Powell expressed concern in a Nov. 30 speech about older workers who have not returned to the workforce and retired earlier than expected during the pandemic.

Advocates note that small businesses and other employers would be helped if workers age 65 and older benefited from the earned income credit and then decided to return to the workforce.

At a time when many are trying to figure out how to make the labor force more welcoming to older workers, the age cap for the earned income tax credit makes it less welcoming, Martin Firvida said.

The economy overall, she said, would benefit if older workers participate in the labor force at higher numbers. Lower wage workers face extra costs for going to work, she noted, including transportation, so an extra tax break can help.

The earned income tax credit is a refundable tax credit, meaning that you could still receive a tax refund even if you don't owe any tax.

Unless the tax break is extended by Congress later this year, as many including the AARP want, some older workers and others aren't going to qualify for the credit on their 2022 returns.

"The earned income tax credit rules revert back to pre-2021 rules," said Matt Hetherwick, director of individual tax programs for the nonprofit Accounting Aid Society in Detroit.

On 2022 returns, the minimum age is 25 as of Dec. 31 on the 2022 federal income tax return; the maximum age is 64 as of Dec. 31 for those without qualifying children.

Some younger people without qualifying children will be shut out from the earned income tax credit this year, too. In 2021, some workers 19 to 24 years old qualified. For 2021 returns only, the minimum age limit was dropped to 24 years of age for a full-time student, 18 years of age for a qualified former foster youth or a qualified homeless youth, or 19 years of age for all others.

Hetherwick said he doesn't have a number for how many clients could see a smaller refund because of the change.

"But I know that for the clients we serve, every dollar matters and last year's expanded earned income tax credit made a positive impact on their lives," Hetherwick said.

And with the child tax credit reverting back to look more like the historical version of the credit, he said, many families "will not be able to claim refunds that research has proven to show a reduction in childhood poverty and food insecurities of our most vulnerable population."

The child tax credit isn't what it used to be

The child tax credit will still exist on the 2022 return, but taxpayers shouldn't necessarily bank on the extension of the expanded child tax credit.

Some key Democrats are trying to reinstate the expanded credit as part of year-end tax and spending package. But as of early December, the expanded credit that added thousands of dollars to family households, lifting many out of poverty, is gone for 2022.

Those who got up to $3,600 per dependent for 2021 for the child tax credit will, if eligible, get up to $2,000 for the 2022 tax year. For a family with two or three qualifying children, the change will be dramatic.  The American Rescue Plan put the maximum child tax credit for 2021 at $3,000 for each child ages 6 through 17 and put the maximum at $3,600 for children 5 years old and younger.

More:IRS sends letters to millions still eligible for generous COVID-19 tax breaks

The smaller available credit for 2022, though, will hit individual tax returns in a variety of ways.

Not everyone saw a supersize tax refund this year, for example, because of the expanded child tax credit on the 2021 return. Some even saw smaller refunds in 2021 than 2020 once they reconciled the available credit with their incomes for 2021.

The IRS made advance payments over six months in 2021 based on available information on one's previous income. The advance payments were designed to cover half the total credit amount that was due. The other half was to be claimed on the 2021 income tax return when the return was filed in 2022.

More:Proposal would permanently increase child tax credit: How much families would get

What happened to the recovery rebate credit?

Another big change: Don't expect to claim a recovery rebate credit for 2022.

Millions of people who received that money in 2021 did not need to claim the recovery rebate credit when they filed their tax return in 2022. The IRS issued stimulus payments or Economic Impact Payments in advance and people who received that money upfront didn't claim the recovery rebate credit.

But others qualified for the recovery rebate credit on a 2020 return or a 2021 return if the IRS didn't send them a stimulus payment or somehow their payment came up short. The maximum credit for 2021 was $1,400 per person, including all qualifying dependents claimed on a tax return. Married taxpayers who filed a joint return for 2021 that claimed two qualifying dependents could have received up to $5,600 as a credit.

Again, we're talking about a lot of money for some taxpayers.

Giving to charity might generate a tax break — or not

Nearly nine out of 10 taxpayers are taking that standard deduction these days — meaning they're not itemizing expenses and claiming deductions, such as charitable contributions, on their tax returns. If you itemize, you can claim charitable contributions.

On the 2020 and 2021 federal income tax returns, though, a temporary tax break was available if you gave cash to a charity but did not itemize.

"At the moment, it is expired for 2022 use," Luscombe said.

While it's possible a similar deduction could be part of a future change in tax rules out of Congress, it's not part of the tax landscape in early December.

In general, those who don't itemize, he said, won't qualify for any tax break for their charitable contributions on the 2022 federal income tax return. That break for charitable contributions — again unless extended by Congress sometime in late December — goes away for the 2022 return.

One special tax break: Those who do not itemize but are older than age 70 and a half could qualify for a tax break for making a charitable contribution through an IRA distribution that's sent directly to a charity. Such a contribution can be up to $100,000 and the saver would avoid claiming that distribution as part of income.

On the 2021 return, a married couple taking the standard deduction was allowed to claim up to $600 for cash contributions made to qualifying charities in 2021, if filing a joint return. A single individual, including married individuals filing separate returns, were allowed to claim a deduction of up to $300 for cash contributions. For 2021, the tax break was not an above the line deduction and it did not reduce your adjusted gross income.

Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on Detroit Free Press: As stimulus tax breaks end, refund shock to hit many on 2022 returns