Stimulus Update: 4 Reasons the IRS Predicts Smaller Refunds This Year. Spoiler: It Has to Do With Stimulus

The programs that helped families get through the pandemic are no more.

It's only been four days since the IRS began accepting tax returns for 2022 earnings. They're already warning that Americans might be surprised to find smaller refund checks deposited into their bank accounts.

There are four primary reasons why.

1. Stimulus checks are gone

On March 12, 2021, the IRS began sending the last of three stimulus payments. However, for various reasons, a slew of taxpayers did not receive their payment. And some of those who did get them received a check for the wrong amount.

Those folks could file a recovery rebate credit when they filed their 2021 tax return. If they were due a refund, the IRS stacked an extra $1,400 (or whatever sum was missing if they received a partial check previously) per eligible recipient on top of their refund. Those dollars would help offset the amount owed if they owed the government money.

Let's say a family of four moved, and the IRS needed their current address, thus causing them to miss out entirely on the $1,400 stimulus checks. They were able to file a recovery rebate credit and could expect to receive $5,600 in addition to their regular refund.

Now that there is no stimulus and no recovery rebate credit, it's back to their usual refund amount.

2. The enhanced Child Tax Credit ended

Another program intended to help families cope with the financial fallout of the pandemic was the enhanced Child Tax Credit. In a typical tax year, a parent can deduct $2,000 per child as a Child Tax Credit. It's not much, but it is intended to help with the high cost of raising a child.

During the pandemic, that amount increased from $2,000 to $3,600 per child under age 6. And for children from 6 to 17, it was boosted to $3,000. Parents had two options: They could either wait and claim the entire credit when they filed taxes or take the first half of the credit upfront, distributed as monthly payments from July to December 2021. They were then eligible to claim the back half of the credit when they filed taxes.

While President Biden initially wanted the expanded Child Tax Credit to run through 2025, Republican legislators voted it down, and the program ended with the December 2021 payment.

Imagine a family with a 5-year-old and a 7-year-old who opted to file for the entire credit at tax time. That meant when they filed taxes in 2022 for the 2021 tax year, they received an extra $6,600.

The good news is that the same family is looking at a $4,000 credit this year. Still, it may seem small compared to $6,600.

3. The pandemic-era charitable deduction tax break is a thing of the past

Typically, Americans can only deduct donations to charity from their taxes if they have enough deductions to itemize. Many Americans do not have enough deductions to itemize or would rather skip the work that goes into itemizing and claim the standard deduction.

When Americans filed their taxes last year, it was for the 2021 tax year. Congress created a temporary tax break for those who made donations in 2021 but did not itemize their taxes. Rather than claim nothing, a single tax filer could claim a $300 deduction, and a married couple could claim $600.

That tax break is gone as well.

4. 2022 was a wild year for investments

The stock market went for a wild ride in 2022, dropping enough to leave some investors nervous. Some of those same investors may be surprised to learn that they have a larger tax bill due to investment gains.

Here's how it happened:

• An investor held a mutual fund directly (rather than in a tax-sheltered account).
• The market became volatile enough that mutual funds had to sell more of their holdings than usual. This included profitable holdings.
• Once sold, the mutual fund distributed gains back to investors.
• Even though an investor's overall portfolio looks like it lost money in 2022, there was a small pocket of gains. It's those gains they'll need to pay taxes on or offset with any losing stocks they sold last year.

The IRS has yet to say how much smaller they expect refunds to be this year, although the average refund for the 2020 tax year was $2,827, and for 2021, it was $3,039. It's safe to say that the IRS expects the average return to be less than that.

While it's bad news for many of us, knowing in advance may help us plan for a more realistic refund.