Prepare for a Smaller Tax Refund This Spring

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After the past couple of years, you might have grown accustomed to getting a smaller tax bill from the IRS. In a lot of cases, you may have even gotten fat refund checks that have been helping you wade through economic turmoil and inflation.

But don’t get comfortable. In 2022, a lot of the tax credits and deductions that were helping Americans through the pandemic are gone, and as of today, we can expect things to stay that way.

“The negative changes that are going to be impacting people this year are caused by the expiration of COVID assistance,” said Robert Persichitte, CPA, CFP®, CFE, Financial Planner at DeLAGify Financial.

That means your tax refund is likely to be smaller this year, or you might find yourself writing a painfully large check to the IRS compared to the 2020 and 2021 tax years.

Tax Day is right around the corner. Read our guide to filing your tax return in 2023.

7 Reasons to Expect a Smaller Tax Refund

Here’s a look at why your tax refund may be smaller than it has been in the past few years.

1. The Child Tax Credit Has Been Reduced

In 2021, the Child Tax Credit jumped from $2,000 per child to $3,000–$3,600 per child, depending on age. You may also remember this as the year you got a prepayment on the Child Tax Credit, with the government sending you checks or direct deposits from July 2021–December 2021. This programming was a part of the American Rescue Plan (ARP).

But the checks stopped coming in 2022. The ARP only included this expansion for the 2021 tax year. That means not only did you not receive the checks ahead of time, but you also won’t get the inflated credit for the 2022 tax year. You’ll only get a max of $2,000 per child like you did back in 2020.

2. The Child and Dependent Care Credit Has Been Reduced

The ARP also significantly expanded the Child and Dependent Care Credit. Normally, this credit applies to the first $3,000 you spent on childcare for one dependent and up to $6,000 for two or more children. Then, the credit is worth 20–35% of your total expenses up to the limit depending on your income. So in normal years, you can claim a max of $1,200-$2,100 for this nonrefundable tax credit.

But the ARP significantly expanded the limits for the 2021 tax year. It upped eligible cost limits to $4,000 for a single dependent, and $8,000 for two or more. There were no fancy percentages, but there was an income cap north of $400,000.

That meant that your credit may have been worth between $2,800 and $5,900 more in 2021. On top of the massive increase, in some cases, it was refundable in 2021. So it didn’t just help bring your tax bill down to $0. It also might have put money back in your pocket.

The ARP didn’t cover 2022, and no additional legislation has been passed. So this year, the max credit is back to $1,200-$2,100 – and none of it is refundable.

3. COVID Sick Leave Credits Have Been Eliminated

This one was a huge deal if you were self-employed. During both 2020 and 2021, the government provided compensation to business owners who had to extend paid sick leave to their employees. Self-employed individuals were able to claim this funding for themselves on their tax return.

At peak, these credits could add up to $5,110, and they were fully refundable. Now they’re completely gone.

4. COVID Caretaking Credits Have Been Eliminated

Through 2020 and much of 2021, many schools were closed or still offering remote options. This created problems for self-employed parents who suddenly had to care for children for several hours a day when they used to work.

For that reason, there was a caretaking leave credit during 2020 and part of the year in 2021. At their peak, these credits may have netted you up to $10,000 per year. Like the COVID Sick Leave Credits, these were fully refundable. And they’re also fully gone for 2022.

States May Have Self-Employment Family Leave Plans

There’s not much you can do to compensate for the loss of sick and caretaking tax credits on your 1040. But Persichitte does note that some states, including his home state of Colorado, offer family leave policies for self-employed individuals and small business owners.

You do have to contribute to the state fund in order to participate. For example, Colorado’s FAMLI plan requires a contribution of 0.45% of your pay for three years in order to gain eligibility as a self-employed person.

5. The Earned Income Credit Has Been Reduced

Childless people are subject to less money on their tax returns, too! In 2021, the Earned Income Credit (EIC) – a subsidy on the minimum wage – was expanded for childless people, with income limits jumping up by about $5,000.

In 2022, those income limits have come back down by almost $5,000, adjusted a bit for inflation.

That means you might have qualified for the EIC in 2021, but that doesn’t necessarily mean you will this year. The EIC is fully refundable, so this can have an outsized impact on your return.

6. A Charitable Donation Deduction Has Been Eliminated

In 2020 and 2021, you could claim a $300 deduction for charitable donations you made throughout the year. If you were married filing jointly, the max deduction was $600.

These deductions were above-the-line, which meant they reduced your income rather than your tax burden. The less income you have, the less money there is to tax. For 2022, this deduction is gone.

New Legislation Allows for Above-the-Line Charitable Donations

If you are of the age to be taking required minimum distributions (RMDs) from your retirement accounts, Persichitte notes that the recently passed SECURE 2.0 opens a new door for above-the-line charitable donations.

You simply make donations directly from your IRA instead of putting the RMD into your bank account. Then, you’ll be able to deduct that donation from your annual income.

7. Recovery Rebate Credits Have Been Eliminated

If you were supposed to receive a stimulus check in 2020 or 2021, but one didn’t show up in your mailbox, there was a way to claim the stimulus money through the Recovery Rebate Credit.

Stimulus checks weren’t issued in 2022, so this credit is gone, too.

Looking to file your taxes for free? We’ve got the rundown on eight handy tools that make free filing possible.

Need Extra (Tax) Credit? New Provisions May Help

Not every tax credit has a direct 1:1 solution transitioning from 2021 to 2022. But there are some new tax credits that might be able to help you make up for some of the money you lost due to the end of COVID assistance policies.

Get Paid to Go Green

The Inflation Reduction Act enacted a host of new tax credits for eco-friendly purchases. Persichitte said you can claim credits for solar panels and certain electric vehicles this year on your 2022 return, but next year tax credits will open up for home renovations like replacing windows or installing a new heat pump.

If you’ve been putting off big, energy efficient projects, 2023 might be a good year to get started.

“For the most part, the credits that are included in the Inflation Reduction Act are primarily going to influence homeowners,” Persichitte said. “But there are some provisions that affect renters both directly and indirectly.”

Directly, renters who have to purchase their own green appliances will be able to claim the same tax credits as homeowners who purchase eco-friendly appliances. While the finer details of the appliance purchase requirements aren’t yet available, it’s a good idea to keep an eye on the Department of Energy’s website and the Energy Star website for updates.

Indirectly, the Inflation Reduction Act gives states money to run their own incentive-based green initiatives. For example, a program could reward you for doing an energy audit and making some lifestyle changes to help the planet. Conceivably, there could be rewards for renters in deregulated energy markets that reward choosing energy suppliers that sell Renewable Energy Credits (RECs.)

It’s too soon yet for most of these programs to be up and running. But we may see them more quickly implemented in progressive states – where they are implemented at all.

“It’s extremely political,” Persichitte said. “And there are  some states that don’t even want the free money because of their political stances.”

He draws an analogy to the expansion of Medicaid funding under the Obama Administration. To this day, 11 states still have not opted into Medicaid expansion for their citizens.

Regardless, it’s a good idea to check up on your state’s plans.

Not sure which tax filing software to use? Here’s our guide to the best tax software of 2023, including the free versions.

Watch for Changes in Your Retirement Plan

SECURE 2.0 was a thick piece of legislation with a lot of changes that will allow everyday Americans to save for retirement more efficiently. For example, part-time workers can now participate in company 401(k)s earlier, and employers may offer matching programs for Roth IRAs. There are enough significant changes that it could alter your long-term tax strategy.

“Going forward, when you get notices of changes to your 401k, don’t throw them away,” warns Persicitte. “It could save you thousands of dollars.”

Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.