Why fewer refunds are expected in 2023?

 

Here comes the 'sticker shock of the tax refund - why fewer refunds are expected in 2023

Tax refunds are a great silver lining for the endless winter — but if you're expecting a big check in 2023, be prepared to see less than in previous years.

Experts and even the IRS warned that a tax refund "sticker shock" will occur early next year for 2022 returns because some of the pandemics benefits from expired refund checks padded in the 2021 season. These include the expanded Child Tax Credit, Child, and Dependent Care Credit, and federal stimulus payments.

Adding to the bad news: "If you owe tax season, you may owe a little more in 2023 because you won't qualify for as many credits," Alex Gailey of NextAdvisor writes.

Here are some of the more pressing issues to consider this tax season, according to CNBC:

Tax Credit Reduction: The 2021 American Rescue Plan helped parents and caregivers get certain credits, but those were extended to something other than this year of application. While providers could claim $3,600 for each child under 6 in 2021, that credit has now returned to a record $2,000 for this year. Also, the child and dependent care tax credits — which rose to $8,000 for one child and $16,000 for two or more children in 2021 — are now back to the standard maximum of $3,000/$6,000.

Third-Party Payment Tax: If you use payment services like PayPal or Venmo, transactions totaling more than $600 per year will now result in a Form 1099-K being issued. Effectively, you are expected to detail your business transactions on these platforms and report any profitable gains as income. This limit was previously set at $20,000.

Charity deductions are trickier: In 2021, it was possible to claim a $300 charitable deduction (or $600 for married couples filing jointly) even if you didn't itemize and instead took the standard deduction. Those seeking to benefit from charitable contributions must itemize, and all itemized deductions (including charitable ones) must exceed the standard deduction.

However, the Internal Revenue Service did point to some good news regarding deductions: Married couples who file joint applications will be allowed a standard deduction of $27,700 — an increase of $1,800. And for single and married couples filing separately, the standard deduction is $13,850, an increase of $900. For heads of household, that number is now $20,800, an increase of $1,400.

This means early preparation is more critical than ever before the 2023 tax season. Start collecting all relevant paperwork, receipts, and documentation for all deductions or itemizing now. Use the IRS Calculator to estimate the taxes due or the amount to be returned, and plan any payments if necessary.

Finally, aligning a tax professional who can minimize any potential headaches is highly recommended if this seems too daunting—or simply more trouble than it's worth.