Getting a Smaller Tax Refund This Year? Here's Why You Shouldn't Panic

A smaller refund does not mean you botched your tax situation.

Some people procrastinate on their taxes and wait until the last minute to get them done. But if you're anticipating a tax refund this year, you may be motivated to get your taxes done well ahead of the April 18 filing deadline. After all, the sooner you get your taxes done, the sooner you can anticipate your refund landing in your bank account.

In 2022, the average tax refund amounted to $3,121 -- not a small number. And if you got a similar refund last year, you may be anticipating a repeat payday this filing season.

But you may find that your tax refund isn't as robust in 2023 as it was in 2022. If so, don't panic -- that's not actually a bad thing, even though it might seem like one.

Why tax refunds could be lower this year

A number of tax credits got a boost in 2021 that didn't carry through to 2022. And perhaps the most notable of those was the Child Tax Credit.

In 2021, the Child Tax Credit was worth up to $3,000 for children aged 6 to 17, and up to $3,600 for children under age 6. But in 2022, the Child Tax Credit's maximum value was only $2,000. That's the same value that's been in place since the 2017 Tax Cuts and Jobs Act was put into place, so it shouldn't come as a shock. But when you sit down to look at your taxes this year, you may notice a lower refund due to the Child Tax Credit reverting to its usual value.

But that's not the only reason you may be looking at a lower tax refund this year. Maybe you worked a side hustle for a few months but never paid taxes on that income. Or maybe you earned more interest income in your savings account, and that caused your refund to shrink. It could also be a combination of different factors -- a lack of a boosted Child Tax Credit and more income on your part.

Don't get upset if your tax refund is lower

Your first inclination may be to get frustrated or even panicked if this year's tax refund is lower than last year's. But one thing you must remember is that a tax refund is not free money.

A tax refund simply represents money you were entitled to earlier on but didn't collect. So if this year's tax refund is smaller, it means you did a better job of collecting your money upfront, as you earned it.

That said, many people count on their tax refunds to do things like pay bills, tackle home projects, or fund vacations. A better bet? Save for those things rather than rely on a refund to make them happen.

Tax refunds can be hard to predict. There are lots of different factors that go into calculating a refund that can change from one year to the next. A smaller tax refund is definitely not a bad thing. But you shouldn't put yourself in a position where you're reliant on that money to meet a specific need or goal.