Tax Changes in 2023: Why Your Tax Refund Might Be Smaller This Year (2023)

Tax season is now open and the IRS is accepting 2022 tax returns. If you've received all your necessary documents like your W-2 form and 1099-K, you can use our picks for the best tax software to file your taxes today. You might want to temper your expectations for a big tax refund, however.

Many of the pandemic tax benefits from the past few years, like the expanded child tax credit, temporary expansions to the child and dependent care credit and federal stimulus payments, ended at the end of 2021, which could mean your refund will be a little smaller this year. And, if youstarted a side hustle or freelance gig, you may find you owe taxes this year.

When it comes to taxes, 2022 is the year of the great reset, said Mark Steber, chief tax information officer for Jackson Hewitt. "A lot of things that were put into place for 2021, and some part 2020, will revert back to prepandemic years, which can lead to refund shock or, more importantly, balance-due shock."

In addition, some new regulations were put into place. Third-party payment apps like PayPal, CashApp and Venmo will now be reporting money earned by freelancers throughout the year to the IRS. Student loan forgiveness -- if passed -- is exempt from federal taxation, but borrowers in some states may owe taxes. And lastly, if you had any crypto activity in the past year, the IRS wants to know about it.

There's a lot to cover, so we'll walk you through the most significant tax changes to prepare for this upcoming tax season.

1. The standard deduction for 2022 is higher

It's typical for the standard deduction to increase a little each year, along with the rate of inflation. For your 2022 tax return, the standard deduction for single tax filers has been increased to $12,950 (up by $400), and has been bumped to $25,900 for those married filing jointly (up by $800).

The standard deduction is what most taxpayers with simple tax returns claim to reduce their taxable income. If you receive a traditional paycheck through an employer and aren't eligible for many special deductions or credits, the standard deduction likely makes sense for you. If you have expenses or individual deductions you'd rather claim,like self-employment tax breaks, you would not claim the standard deduction.

(Video) Why your tax refund will be smaller in 2023

2. Income tax brackets are also higher in 2022

For the 2022 tax year, income tax brackets were also raised to account for inflation. Your income bracket refers to how much tax you owe based on your adjusted gross income, which is the money you make before taxes are taken out, excluding itemized exemptions and tax deductions.

While the changes were slight, if you were at the bottom of a higher tax bracket in 2021, you may have bumped down to a lower rate for your 2022 tax return.

2022 tax brackets for single filers

Taxable income Federal tax rate
$10,275 or less 10%
$10,276 - $41,775 $1,027.50 plus 12% of income over $10,275
$41,776 - $89,075 $4,807.50 plus 22% of income over $41,775
$89,076 - $170,050 $15,213.50 plus 24% of income over $89,075
$170,051 - $215,950 $34,647.50 plus 32% of income over $170,050
$215,951 - $539,900 $49,335.50 plus 35% of income over $215,950
$539,901 or more $162,718 plus 37% of income over $539,900

2022 tax brackets for taxpayers who are married, filing jointly

Taxable income Federal tax rate
$20,550 or less 10%
$20,551 - $83,550 $2,055 plus 12% of income over $20,550
$83,551 - $178,150 $9,615 plus 22% of income over $83,550
$178,151 - $340,100 $30,427 plus 24% of income over $178,150
$340,101 - $431,900 $69,295 plus 32% of income over $340,100
$431,901 - $647,850 $98,671 plus 35% of income over $431,900
$647,851 or more $174,253.50 plus 37% of income over $647,850

3. The child tax credit has returned to normal

While 2021 had a temporary expansion of the child tax credit, including eligibility for more dependent children and offering advance payments, that isn't the case for your 2022 taxes.

The CTC has dropped back down to its pre-pandemic amount -- $2,000 per child or dependent -- and is now only available for children under 17 years of age. The credit, which was fully refundable last year, is now only partially refundable to some lower-income parents, and advance payments are no longer in effect. (Partially refundable means you can only receive a portion of this credit as a refund, though the full amount can be applied to your tax bill.)

That said, you should still claim the CTC in 2022 if eligible -- it can help boost your refund or may help offset a tax bill. And, while federal benefits have decreased, some states are offering child tax credit benefits this year and next.

(Video) IRS says tax refunds may be smaller this year

4. Fewer filers will qualify for the Child Care and Dependent Tax credit

In 2021, the Child Care and Dependent Tax Credit also received temporary expansions, allowing those who made $125,000 or less to deduct between 20% to 50% of $4,000 (or $8,000 for parents with more than one child) in qualifying child care expenses. It was also refundable.

For 2022, this tax break has also reverted backto what it was in 2020. Now, parents with one child can only claim up to 35% of a maximum of $3,000 in qualifying expenses, for a maximum amount of $1,050. Parents with more than one child are eligible for up 35% of up to $6,000 in qualifying expenses, for a maximum amount of $2,100.

The biggest difference is the income qualification. To receive this credit in full in 2022, you must have made $15,000 or less -- a steep drop from 2021's $125,000 income threshold -- though households earning up to $438,000 will receive at least partial credit.

5. If you don't have kids, it's harder to qualify for the Earned Income Tax credit this year

Last year, more Americans were eligible to claim the Earned Income Tax Credit on their 2021 tax returns. This year, the EITC jumps back to its pre-pandemic rules.

For your 2022 tax return, the maximum you can claim for the EITC if you do not have kids or dependents is $560, a $942 decrease from last year's maximum of $1,502. The age requirements have also shifted back to the original rules -- you must be between 25 and 65 to qualify.

However, the income requirements for the EITC and maximum credits for those with children have increased slightly due to inflation. The 2022 income thresholds and maximum credit information are below:

2022 EITC income thresholds (for maximum credit)

Number of dependents Filing as Single, Head of Household or Widowed Married Filing Jointly
0 $16,480 $22,610
1 $43,492 $49,622
2 $49,399 $55,529
3+ $53,057 $59,187
(Video) Why your tax refund may be smaller this year

EITC maximum credit for 2022

Number of dependents Maximum credit in 2022 Maximum credit in 2021 Difference
0 $560 $1,502 $942 decrease
1 $3,733 $3,618 $115 increase
2 $6,164 $5,980 $184 increase
3 or more $6,935 $6,728 $207 increase

6. If your student loans were forgiven, you may owe state taxes

Though widespread federal student loan relief remains on hold, you may have received student loan forgiveness through the Public Service Loan Forgiveness program or another similar endeavor. if you had any balances forgiven in 2022, you won't owe federal taxes on the canceled amount. That's because of a provision tucked into the 2021 American Rescue Plan, preventing forgiven post-secondary education loans from federal taxation through 2025.

However, there are a handful of states where forgiven loan balances may be taxed.Indiana,Minnesota,MississippiandNorth Carolinahave confirmed they will tax any student loan debt relief on your 2022 taxes. A few other states may as well, though the details are still being hammered out.

And, if you live in one of the states taxing forgiven student loans, you may be on the hook for county taxes on your debt relief, as well.

7. You have to report your crypto and NFT transactions

While not technically new, for 2022 the IRS is making a more concerted effort to track cryptocurrency sales and trades. Whenever you sell or trade your crypto or purchase an item with crypto, you trigger a taxable event. Currently, crypto is taxed like property, making it subject to short- or long-term capital gains taxes. This also means you can report any crypto losses to help offset any gains. Since 2022 saw a drastic drop in the value of cryptocurrencies like bitcoin and ethereum, if you sold or traded your crypto at a loss, you may be able to reduce your tax bill by reporting your capital loss. The same goes for NFTs.

And though the IRS will flag any unreported crypto gains, if you don't report a loss that can lower your tax burden, the IRS won't adjust your return on your behalf. "If you leave it off, it stays off," said Steber. "Tax deductible losses from your virtual currency activity do have real consequences on your tax return, and can save you real dollars. So I always tell people, if you've got something that you don't fully understand, you certainly should seek out guidance from a trained experienced tax professional."

If you have a lot of crypto or NFT activity, we recommend talking to a tax expert. But If you'd rather handle your taxes on your own, check out our top picks for crypto tax software to make filing your taxes a little easier.

(Video) Why you can expect a smaller IRS tax refund this year | DON'T WASTE YOUR MONEY

8. PayPal, Venmo and other third-party apps will report your payments to the IRS

If you've been self-employed or freelancing for a few years, you likely already know that you're required to report your freelance earnings to the IRS. This year, your earnings will be even easier for the IRS to access, since third-party payment apps are now reporting your payment activity to the IRS.

While you'll still need to report your earnings like usual, the difference is, the IRS will be able to verify the amounts you report against the transactions the payment apps provide. So, if you're off by $100, the IRS will know.

This new regulation could help freelancers. Platforms like PayPal, Venmo, Cash App, Zelle and others will be providing users with 1099-K forms, which can make reporting your income a little easier.

And don't worry -- the money you gifted to your kids is safe from taxes. Only earnings sent through these third-party apps are subject to taxation.

No matter how you were paid, if you had any self-employment income in 2022, Steber recommends working with a tax professional to make sure you take advantage of every eligible tax break. "Self-employed people have some of the most complex tax returns, and quite frankly, some of those lucrative tax benefits in the tax code to watch out for," he said.

9. Retirement contribution limits increased

For 2022, the individual401(k) contribution limit increasedto $20,500, a $1,000 increase from 2021. If you're over 50, you can contribute an additional $6,500. The total contribution limit, which includes your employer's contributions, is $61,000 for 2022 ($67,500 for those 50 or older). IRA contributions remained unchanged at $6,000 for the year, with a $1,000 additional catch-up contribution for those 50 or older.

Contributions to SIMPLE IRAs were also increased in 2022, rising from $13,500 to $14,000. Those over 50 can contribute an additional $3,000.

(Video) IRS Issues Warning - Smaller Tax Refunds This Year - Here's Why...

With the end of the year fast approaching,maximize your retirement contributionsbefore the end of December. However, if you have an IRA, you can continue contributing for tax year 2022 until April 18, 2023, next year's tax filing deadline.

More Americans may qualify for the Saver's credit this year, since the IRS increased the income thresholds for 2022. It's worth up to $1,000 for single filers ($2,000 for married, joint filers), as long as you contribute to a retirement account and meet AGI requirements. For this tax year, your AGI must not be over $34,000 for single filers and those married filing separately, $68,000 for married, joint filers and $51,000 for head-of-household filers.

10. Temporary charitable donation deductions have ended

Fewer filers may be able to claim charitable donation tax breaksfor this tax year. The expanded charitable cash contribution benefits that were offered in 2020 and 2021 have ended. The temporary suspension of the 60% AGI limit in 2020 and 2021 is now back, limiting the amount you can claim in charitable contributions.

More tax advice

  • Maximize Your Tax Refund in 2023: End-of-Year Tax Checklist
  • All the Homeowner Tax Breaks for 2022: How to Maximize Your Tax Refund
  • Student Loans Forgiven? You May Owe Taxes on Your Debt Relief
  • Charity at Checkout? Skip Store Donations to Save Money on Your Taxes

FAQs

Why will tax refunds be smaller this year? ›

The IRS starts accepting 2022 tax returns Monday. Jan Lewis of the American Institute of CPAs says some taxpayers might receive smaller refunds as many pandemic-related breaks are no longer available.

Are refunds lower this year? ›

More than 168 million individual tax returns are expected, according to the agency. But with a number of key tax credits returning to pre-pandemic amounts, the IRS says taxpayers could see a lower refund this year, especially compared to last year.

Why is my refund getting smaller? ›

Typically, you get a federal refund when you've overpaid yearly taxes or withheld more than the amount you owe. You may receive a lower refund because there was no stimulus payment in 2022, and there's a less generous tax deduction for charitable gifts, the IRS said.

Will I get a bigger tax refund in 2023? ›

Refunds may be smaller in 2023,” the IRS said bluntly in a statement last November. “Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no Economic Impact Payments for 2022.

Why is my 2022 tax return so low? ›

For tax year 2022 some tax credits that were expanded in 2021 will return to 2019 levels. This means that affected taxpayers will likely receive a smaller refund compared with the previous tax year.

What is the tax table for 2023? ›

The 2023 tax year will have the same seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your filing status and taxable income, including wages, will determine the bracket you're in.

How much do you get back for a child on taxes 2023? ›

Most families will receive the full amount: $3,600 for each child under age 6 and $3,000 for each child ages 6 to 17.

What will the standard deduction be for 2023? ›

For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

Why did my tax return drop so much? ›

If your refund was less than you expected, it may have been reduced by the IRS or a Financial Management Service (FMS) to pay past-due child support, federal agency nontax debts, state income tax obligations, or unemployment compensation debts owed to a state.

Why am i getting less tax refund this year 2022? ›

The Internal Revenue Service is already warning people that their 2022 refunds may be less than their refunds from the last two years since many of the pandemic tax benefits — like the expanded child tax credit, child and dependent care credit, and stimulus payments — ended in 2021.

Why is my tax refund smaller 2022? ›

In some instances, taxpayers may owe money. The federal government temporarily expanded several tax credits for 2021 to help support families during the depths of the Covid-19 pandemic. But Congress declined to make the changes permanent, so the credits reverted to prepandemic levels for 2022.

Why is my tax refund less than what I filed 2022? ›

Why is my refund different than the amount on the tax return I filed? All or part of your refund may have been used (offset) to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans.

Will my tax return be less in 2022? ›

The IRS starts accepting tax returns for 2022 earnings on Jan. 23, and it will issue tax refunds in the weeks and months that follow. And some of us could be in for a surprise. "People should absolutely expect smaller tax refunds this year.

What tax changes are coming in 2023? ›

Standard deduction increase: The standard deduction for 2023 (which'll be useful when you file in 2024) increases to $13,850 for single filers and $27,700 for married couples filing jointly. Tax brackets increase: The income tax brackets will also increase in 2023.

Will taxes go down in 2023? ›

When it comes to federal income tax rates and brackets, the tax rates themselves aren't changing from 2022 to 2023. The same seven tax rates in effect for the 2022 tax year – 10%, 12%, 22%, 24%, 32%, 35% and 37% – still apply for 2023.

What's the child tax credit for 2023? ›

The Child Tax Credit is scheduled to stay at 2,000 dollars per eligible child for tax year 2023, but without any upfront monthly payments. Due to a temporary change in law, more families-including those without recent income-now qualify for and receive funds from the Child Tax Credit (CTC).

How much of a tax refund will I get in 2022? ›

Average tax refund in 2022: $3,039

The average individual income tax refund was $3,039 for the 2021 tax-filing year, a 7.5% increase from 2020 when the average refund was $2,827.

What is the max tax refund? ›

There's no limit on the amount your tax refund can be. However, in some cases, high-value tax refunds may be sent as a paper check instead of a direct deposit. The IRS doesn't publish the threshold for when a check is issued instead of a direct deposit, but it does limit direct deposits to three deposits per account.

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