IRS says your tax refund could be smaller in 2023 – Here's why and how to prepare
Tue | January 2023
Since the pandemic hit in 2022, tax-paying businesses and families have gotten larger tax refunds from the government. These larger tax refunds are primarily due to initiatives — expanded Child Tax Credit, stimulus payments, and Child and Dependent Care Tax Credit — introduced by the federal government. However, some of the incentives ended in 2021, and others have lesser amounts.
In November 2022, the Internal Revenue Service (IRS) announced that there would be lower tax refunds during the 2023 tax season. The announcement is not good news for most people who have received a high tax return in the past two years. If you want to know why the 2022 tax refund will be less, this article provides the answer. It also covers preparing for Tax Day 2023 (i.e., April 18).
Why the 2022 tax refund is less than expected
Why is my tax return so low for 2022; This is the question most people will ask this 2023, especially if they missed the IRS announcement. Americans who pay taxes get a return for excess payments or money withheld. The refunded money can be substantial depending on whether the taxpayer has children and their tax bracket.
For instance, in 2022, the average return was $3,176, an increase from $2,800 in 2021. However, this year, the tax refund is less than expected for several reasons. First is the lack of stimulus payments from the federal government since 2021. As such, taxpayers had to get stimulus money from their tax filing for 2021.
Also, some benefits whose amounts increased during the pandemic have returned to their previous sum. For example, the Child Tax Credit has reverted to $2,000 from the $3,600 received per child. Furthermore, the Child and Dependent Care Tax Credit also returned to the pre-pandemic level.
The new tax law states that parents can get up to 35% of $6,000 as a credit on their taxes for 2022. The credit covers two or more children and amounts to $2,100 maximum this year. The Earned Income Tax Credit (EITC) is not left out.
The EITC for low-income earners rose to $1,500 during the pandemic. But now, the amount will revert to $560. Also, individuals who claimed up to $300 in tax deductions from 2020 and 2021 can no longer do so.
The November IRS press release warned that taxpayers have no fixed date to receive their 2022 tax refund. They advised taxpayers to exercise caution when buying large items or paying their bills. In addition, the agency said some tax returns would take longer because there will be extra reviews this year.
As mentioned, this is unwelcome news for Americans, especially those who rely on refunds to conduct significant transactions, pay their debt, or save for retirement. Small business owners who qualify for tax refunds and depend on them to finance their businesses will also be affected.
How do you prepare for Tax Season 2023?
Now you know why your 2022 tax refund will be less. However, if you want to get your returns early, you must file on time, and the preparation starts now. So, how do you prepare to file a Federal Income Tax Return?
Assemble your tax documents
The first step is to get organized and assemble your tax documents. This ensures you get all the records and reduces the chances of making mistakes. If there are errors, your tax return will get delayed, and in some cases, you may commence the process all over again.
Therefore, ensure you have the following documents ready:
The IRS W-2 Form (get it from your employer)
Miscellaneous income Form 1099 (1099-MISC, 1099-INT, 1099-K)
Mortgage interest statement Form 1098
The record of stock investments or other assets sold in 2022 (this includes cryptocurrencies and digital assets)
Health insurance Form 1095 (this is for those that patronized the Health Insurance Marketplace)
Form 1098 for those with more education costs
CP01A Notice alongside your new Identity Protection Pin
You can also add any vital IRS letters or notices. For tax filing deadlines and more information, consult USA Gov on: "How to file your federal taxes."
Get an estimate of your tax bill
After assembling your documents, review them to know what you owe the IRS and get an estimate of your 2022 tax refund. If you don't know how to do this, hire a tax professional. However, if you can't pay for a professional, you can use online tax calculators.
An online tax calculator is the best option if you do not have complex taxes. Also, identifying how much tax you've paid and what's excess helps you deal with any problem that might arise. The IRS Tax Withholding Estimator is an excellent tool for checking what should have been removed from your paycheck as tax.
Create an IRS Account
If you have an IRS account, you can use it; but if you don't, then create one. The account gives you access to updated information on your tax records, including your 2022 tax refund. Also, you can see the taxes paid, what you owe, and a payment plan you can use.
Furthermore, you can electronically sign a power of attorney from your tax advisor. When creating an account, use the same address on your IRS bills and tax documents. Finally, if you do not have an Identity Protection Pin, get one.
Renew Your Expired/Expiring Tax ID Number
Check your Individual Tax Identification Number (ITIN) to see if it has expired or is close to expiring. If it has, you need to renew it before filing a 2022 tax return.
To renew your ITIN, submit Form W-7, Application for IRS Individual Tax Identification Number, to the IRS now. If you don't get a new ITIN, your refund will get delayed, and you may be ineligible for some tax credits.
In conclusion
Although your 2022 tax refund will be less than the previous year, you can still get a fair amount. Therefore, prepare your documents, and take the other steps discussed above to ensure your refunds for next year get on time.
Also, if you have acquired funding through us, you can probably write off the cost of capital for your taxes to help improve your returns. Merchant cash advances are not reported as income because an MCA is an advance against a business's expected future income. Therefore, as you pay back the advance, the portion of the payback amount representing the fees could be deductible. The amount you can deduct (assuming you are entitled to claim a deduction) varies according to the advance terms.
Want to learn more? Please read our article about the "Tax advantages of merchant cash advances" or reach out to your National Account Executive asap!
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.