A constantly changing tax code makes it hard for families to plan their financial lives, one expert says. In 2022, Julie Groce's larger-than-usual income-tax refund arrived just in time. The teacher, who lives in Grand Blanc, Mich., had a daycare provider for her 4-year-old son that fit her family's needs regarding quality, proximity and cost. But that cost had just increased by $100 a month, so part of her 2021 federal refund of approximately $6,500 went straight toward covering that increased monthly bill. This year, Groce isn't expecting a repeat performance from her tax refund. She's hoping for something in the $3,000 to $4,000 range, which is a more typical amount for her and her husband. But the family's expenses have continued to increase, including another $100 per month for the childcare bill. Groce, 38, said any refund is welcome. "Every year [that] I get money [back], I feel like I'm doing good," she said. But this year, "I feel like it will have less of an impact," she said.
The majority of Americans receive a refund, and for many it's one of the year's most significant financial events. As the 2023 tax season approaches with high inflation still in place and recession worries looming, it's an especially bad time for refunds to shrink -- but that's what is likely to happen for many people, according to tax experts and the IRS. There were no stimulus checks to claim in 2022, and pandemic-related increases to tax credits geared at families with children and at low- and middle-income workers without children reverted to prepandemic levels. That includes the child tax credit, which was enhanced for 2021 only. An effort to revive the credit's boosted payouts did not make it into a 2022 year-end spending deal. Affected taxpayers will likely receive a significantly smaller refund [in 2023] compared with the previous tax year," the IRS cautioned in December.
The average individual refund in 2022 was $3,176, a nearly 14% increase over the previous year, according to IRS statistics through late October. In 2020, the average refund (for tax year 2019) was $2,549. It's tricky to accurately forecast how many people will see reduced refunds and by how much those refunds will decline this year, experts say. And certain credits remain temporarily extra generous, like eligibility rules for the premium tax credit that's connected to Affordable Care Act healthcare plans.
"Generally speaking, I think refunds are going to come back where they were in 2020," said Mark Jaeger, vice president of tax operations at TaxAct, a tax-preparation software company. "This is the problem with having a tax code that is difficult to understand and constantly changing," said Elaine Maag, senior fellow at the nonpartisan Tax Policy Center. "It disrupts families' ability to plan their financial lives."
Whatever refund Groce gets, she said she'll find a way. "But it's a little easier to plan when you know it's going to be consistent," she said. "If the money coming in is going to change, that's where it gets a little shaky."
Here are some things U.S. taxpayers can expect this year.
Child- and dependent-care credit
Groce claimed this credit, and it's likely what helped turbocharge her 2021 refund. The credit's formulas were more generous for 2021, with the maximum payout for care for a single child or dependent climbing to $4,000 from $1,050. For two or more dependents, the maximum was $8,000 instead of $2,100. For 2022, the maximum drops back to $2,100, according to the IRS.
However, the credit is not widely used. In a typical tax year, approximately 12% of families benefit from the credit, which returns an average of $600 to the households that claim it, Maag said. Last year, approximately 14% of families with children claimed it, and the average payout was $2,100, she said. "For the small group of people that got the credit, it's a relatively large change," she said.
The number of households that claim the credit is low for a number of reasons, including the availability of other childcare subsidies for low-income families, as well as the use of informal caregiving arrangements between family and friends, Maag said.
Child tax credit
In 2021, the child tax credit was boosted from a maximum of $2,000 to $3,600 per child under age 6, and to $3,000 for children ages 6 to 17. For 2022, it's back to the maximum payout of $2,000, with a cutoff age of 16.
Half of the boosted credit was paid in monthly installments during the second half of 2021, and the other portion was put into tax refunds for tax year 2021, which were paid in the 2022 tax season.
That might make actual refund payouts for those who claim the credit slightly larger this year, because $2,000 per child is the maximum applied to a refund, as compared with half of $3,000 per child ($1,500) or half of $3,600 ($1,800).
But if households chose to receive the entire enhanced credit in their refund and were within the boosted credit's income-eligibility rules ($75,000 for an individual or $150,000 for a married couple filing jointly), they likely received more last year than they will this year.
Families with a baby born in 2021 also got a major boost, because that tax return was the first time the child appeared on the IRS radar. That resulted in a lump-sum payment of $3,600 for the boosted credit and a third-round stimulus check of $1,400, observers noted. Those amounts will not apply for the 2022 tax year.
Meanwhile, the credit's full "refundability" in the 2021 tax year opened it up to households regardless of earned income, pausing a $2,500 earned-income threshold. Now that is also back to the pre-existing rules, which means that some low-income households may not be able to access the full credit or even a partial credit.
For approximately 2 million children, their households will not qualify for any of the credit because of the refundability rules, and for another 17 million children, households will not be able to receive the full credit, Maag said.
Earned-income tax credit
Like the child- and dependent-care credit and the child tax credit, the earned-income tax credit also got a temporary boost from the American Rescue Plan of March 2021. The biggest boost came for people who claim this credit and do not have kids in the household, so-called "childless workers." Maximum earned-income tax credit payouts for those workers jumped from roughly $500 to $1,500.
Other rules were relaxed, including age requirements For one year, the minimum eligibility age generally dropped from 25 to 19 and the maximum age paused, thereby including workers age 65 and above.
The dynamic scales back the refund for childless workers who would already be able to claim the earned-income tax credit and eliminates it altogether for the workforce's youngest workers and oldest ones, Maag said.
More than 29 million returns claimed the earned-income tax credit as of mid-July 2022, IRS statistics show. In the same period one year earlier, 7 million fewer returns had claimed the credit for their 2020 tax year refund, agency figures said.
Other deductions
One deduction that allowed millions of Americans use charity donations to reduce their taxable income is gone.
There's still a charitable-contribution deduction for people who itemize. But during the 2022 filing season, taxpayers could take the standard deduction -- which the majority do -- and also deduct their 2021 cash donations to charity The above-the-line deduction was $300 for single filers and $600 for married couples.
Over 42 million returns claimed the deduction through mid-July, for a total of approximately $15.6 billion, IRS records show.
Teachers like Groce do have the benefit of an increasing deduction specifically for educators, but the increase is modest. This tax season, the tax code will allow educators to deduct up to $300 in unreimbursed out-of-pocket expenses due to IRS inflation adjustments.
It's the first-ever increase since the deduction's 2002 enactment at $250, the agency noted. But as Colin Sharkey, executive director of the Association of American Educators, noted, "It's possible current inflation has already erased that increase." Sharkey's organization has pushed to make the deduction $1,000, with $400 of that sum going to cover the cost of home internet.
What can be done?
Even though we've already entered 2023, there are still ways to reduce your 2022 taxable income. One potential move, depending on your income, marital status and access to a retirement plan at work, is making contributions to an existing IRA before April 18. But a family that's tight on cash might not be able to do that. To read more click here.
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