If you are expecting a tax refund for the 2023 tax year, it may be smaller than you originally hoped for, according to the IRS. Usually, you will receive a federal refund if you’ve overpaid yearly taxes or withheld more than the amount you owe. Your annual balance is based on your taxable income, which is calculated by taking the greater of the standard or itemized deductions and subtracting that from adjusted gross income.
Why the Smaller Refund?
In 2021, during the COVID-19 pandemic, the government issued its third round of $1,400 stimulus per person, eligible Americans were able to file a claim for unpaid funds on their 2022 tax returns. On average, a refund for the 2022 filing season was $3,176 as of October. 28th, according to the IRS that is nearly a 14% jump from the $2,791 average in 2021
“Refunds may be smaller in 2023,” the IRS said in a November news release about preparing for the upcoming tax season. “Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no economic impact payments for 2022.”
Charitable Deductions
Charitable deductions will also play a role in a smaller refund for 2023. According to the IRS, it will be more difficult to claim a deduction for charitable gifts on your 2022 return. “Deductions for charitable donations in 2022 are not as robust as 2021,” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
Congress gave charities some help in 2020 in response to the pandemic by offering them tax incentives for cash gifts, and lawmakers extended that incentive for 2021, that tax break was not extended to 2022, which means there is no longer a benefit for charitable gifts if you take the standard deduction, said the IRS.
Wrap Up
It does seem like the IRS is starting to return the tax season back to pre-pandemic norms, offering fewer benefits for charitable deductions on your returns and no more stimulus payments, thus the reason you might see a drop in your 2023 return. If you have any questions on this, give us a call for professional financial help.