Many Americans count on their tax refund to cover large purchases or offset debt. However, the Internal Revenue Service (IRS) warns tax refunds may be smaller in 2023. While the outcome of this tax year will be different for every taxpayer, the tax refund for 2023 may be lower compared to 2022.
Here are some of the factors that will influence the prospective tax refunds in 2023.
How Tax Refunds Work
When a taxpayer overpays taxes, the IRS will issue a reimbursement called a tax refund. Although an unexpected tax refund may seem like a windfall profit, it’s actually a refund of excess taxes paid in the given tax year. Taxpayers who qualify for refundable credits, like Child Tax Credit or Earned Income Tax Credit, may also get a tax refund.
More accurate tax management can reduce the possibility of overpaying taxes. This can help you keep more of your hard-earned money.
The Average Tax Refund Was Higher During the COVID-19 Pandemic
At the peak of the COVID-19 pandemic, the U.S. government launched a series of tax relief actions to help Americans survive the crisis. These emergency measures included:
- Higher tax credits for child and dependent care
- Child tax credit expansion for children aged up to 17
- Expanded Earned Income Tax Credit
- Charitable tax deductions, even for taxpayers who opt for the standard deduction (as do most tax filers)
- Economic Impact Payments (stimulus payments) for eligible individuals
While many Americans benefited from this additional tax relief, those pandemic-induced tax actions were temporary. Once the acute phase of the pandemic had passed, the government began to phase out emergency tax breaks, which is why tax refunds may be smaller in 2023.
Why Tax Refunds for 2023 May Be Lower
Your 2023 tax refund may be lower because:
- Lack of stimulus payments. Since the IRS didn’t issue Economic Impact Payments in 2022, tax refunds for 2023 won’t include an extra stimulus payment.
- No charitable deductions for standard deduction filers. For the tax year 2021, you could claim a tax break for donations up to $300 (single filers) or $600 (married couples), even without itemizing the rest of your deductions. This tax break didn’t extend to 2022, so Americans who choose the standard deduction can no longer claim charitable gift deductions.
IRS Implements More Stringent Reporting Requirements for Payment Apps
In addition to the two major reasons tax refunds may be smaller in 2023—no federal stimulus checks and less simple credit for charitable deductions—the IRS now imposes lower reporting thresholds for Venmo, CashApp, and other third-party payment-processing networks for businesses.
Before the tax year 2022, you only needed to fill out Form 1099-K to report transactions if you carried out over 200 transactions with a cumulative worth above $20,000 that year. Today, taxpayers may need to file a 1099-K even for a single transaction over $600 unless the sum is a gift from family or friends.
This shift in IRS policies and requirements may lead to slower tax refund processing. IRS officials and leading financial authorities warn taxpayers: in 2023, you can’t count on your refund to arrive within the same timeframe as in previous years.
Levy & Associates Tax Consultants: Two Decades of Flexible Tax Solutions
Tax regulations, breaks, and refunds fluctuate from year to year, which makes tax season a stressful time for many Americans. While tax refunds may be smaller in 2023, you can feel confident you’re getting the maximum refund this upcoming tax season with professional tax services. At Levy & Associates, we offer hassle-free tax management and help with IRS audits, liens, and penalties.
Call us at 800.TAX.LEVY or contact us online to learn about our tax services.