The arrival of tax season can evoke a mix of emotions, encompassing both relief and anticipation, as people eagerly anticipate receiving their tax refunds from the IRS. Nevertheless, certain taxpayers might experience disappointment when they discover that the refund amount they receive is not as substantial as anticipated, or even lower than the initial figure they observed when filing their tax returns. This prompts the question: What could be the reason behind a smaller-than-expected tax refund for the year 2023?
There are several factors that contribute to a IRS tax refund being lower than expected this season. Firstly, the tax benefits introduced under the American Rescue Plan underwent modifications or were completely eliminated for the tax year 2022. As a result, many tax credits, such as the Child Tax Credit, Child and Dependent Tax Credit, and Earned Income Tax Credit, reverted back to previous provisions or ceased to exist altogether.
Understanding the Impact on Your Refund: Tax Benefit Changes and IRS Adjustments
The IRS has issued multiple announcements cautioning taxpayers that their refunds may be smaller than anticipated this year if they were able to claim any of these tax benefits in the previous year. The alterations to the tax provisions have had a significant impact on the amount of tax refunds for the current tax season.
In this discussion, we will explore the modifications made to tax benefits that have led to decreased tax refunds. The American Rescue Plan, enacted in March 2021, was designed to offer financial assistance to numerous individuals across the country. It encompassed third stimulus payments and expanded tax benefits and credits that families could claim on their 2021 tax returns (filed in 2022). However, a considerable number of these tax benefits have since returned to their pre-American Rescue Plan provisions or have been entirely eliminated, resulting in noticeable decreases in refund amounts.
Here are some notable changes that have occurred in specific tax benefits:
- Child Tax Credit: The maximum credit amount decreased from up to $3,600 in tax year 2021 to up to $2,000.
- Child and Dependent Care Credit: The credit amount decreased from up to $8,000 for two or more children (up to $4,000 for one child) in tax year 2021 to up to $2,100 for two or more children ($1,050 for one child).
- Earned Income Tax Credit (EITC) without kids: The EITC was expanded in tax year 2021 to include filers without children and removed age limits. However, for tax year 2022, the age limits have been reinstated, meaning individuals under 25 or over 65 may no longer qualify.
- Recovery Rebate Credit: Tax year 2021 was the final year to claim the recovery rebate credit for eligible individuals who did not receive the third stimulus payment sent in 2021.
- Self-Employed Sick and Family Leave Credits: The American Rescue Plan extended refundable tax credits for sick leave and family leave through tax year 2021 for eligible self-employed individuals and small business owners. However, these credits expired after tax year 2021.
- Cash Charitable Donations: Under COVID Relief, individuals were allowed to deduct up to $300 in cash donations ($600 for married couples filing jointly) on their 2021 taxes if they claimed the standard deduction. However, this deduction is no longer available if the standard deduction is claimed.
In addition to alterations in tax benefits, the IRS may make adjustments to your tax refund based on discrepancies between the information you reported on your tax return and the data they have on file. Common errors that lead to such adjustments include overlooking income, entering numbers incorrectly, or modifications to specific deductions or credits. Moreover, if another individual claims your dependent on their tax return, it can result in adjustments to your refund.
Another factor that can decrease your tax refund is the Treasury Offset Program. This program is responsible for collecting outstanding debts owed to federal and state agencies. Delinquent debts submitted by different agencies can be offset against your refund, reducing the final amount you receive.