Expecting a tax refund? Well this year’s tax returns may hold some surprises for your wallet.
In fact, with the high inflation and high interest rates, refunds for taxpayers are on average 10% smaller this year than last year, in part due to expired pandemic relief programs. And this year’s money won’t go as far as it did a year ago.
Official tax-filing season kicked off Monday, January 23 with the filing deadline today, April 18. However, the filing deadline has been extended for parts of California, Alabama, Georgia, New York, Tennessee, Arkansas, Mississippi and Indiana that were hit hard by severe weather. But fret not, if you miss this deadline, you have until October 16, 2023, but if you do not e-File a Tax Extension by April 18, you can face late filing penalties if you owe taxes.
So, whether you expect to file your 2022 federal income tax return right away or wait until the last minute, now is a good time to get a sense of whether you’ll owe more money to the IRS, or whether you’ll likely get a refund and if so, how much.
According to the most recent IRS data available, the average refund is $2,878, down from $3,175, a difference of nearly $300.
For many households, especially working families, tax refunds are the biggest one-time financial windfall of the year, said Kathy Pickering, chief tax officer of H&R Block.
“We know that working families in general are the most cash-strapped,” she said, adding that the expanded earned income tax and child tax credits during the COVID pandemic provided a lot of benefits for families with children.
For instance, while the pandemic credit was still intact, the child tax credit was as high as $3,600 per child. For tax year 2022, parents may now claim a maximum child tax credit of $2,000 for each child through age 16 if your modified adjusted gross income is below $200,000 ($400,000 if filing jointly). Anything above those levels, the credit starts to phase out. Not to mention, the portion of the credit treated as refundable — meaning it is paid to you even if you don’t owe any federal income tax — is capped at $1,500, and that is only available to those with earned income of at least $2,500.
Child and dependent care credit is also notably lower for tax year 2022 because Congress let the 2021 enhancements to it expire. On your 2022 return, you may claim a maximum of 35% on up to $3,000 in expenses for one person, or up to $6,000 of expenses for two or more people. It is a non-refundable credit, meaning you may only claim it if you have federal income tax liability to offset. This is a major difference with the tax year 2021, especially because the credit was fully refundable and was worth a maximum of 50% on up to $4,000 in expenses for one person or up to $16,000 for two or more.
Another refundable credit that has been affected is the Earned Income Tax Credit (EITC). This credit has been a way to financially help low- and moderate-income workers (defined in 2022 as those with earned income under $59,187), and especially filers with children. Luckily, the EITC is also available to earners without qualifying children, but the size of the credit for someone in this group is just $560 for 2022. That is almost $1,000 less than the $1,502 they were allowed to claim in 2021 as a result of a one-year enhancement that was part of the American Rescue Plan.
As for charitable deductions, they will now need to exceed the standard deduction of $12,950 for single filers or $25,900 for those married filing jointly. Since many filers don’t itemize, that typically means any charitable contributions they made during the year aren’t reported on their returns because they got subsumed under the standard deduction. But for tax years 2020 and 2021, filers were allowed to take what’s called an above-the-line deduction for charitable contributions up to $300 ($600 if married filing jointly) in addition to the standard deduction. That above-the-line deduction, however, has expired.