Should You Be Prepared for a Smaller Tax Refund in 2023?

The average American's tax refund is likely to be much smaller this year.

Tax season 2023 is now underway, and the IRS has started accepting returns for the 2022 tax year. Refunds should begin showing up in Americans' bank accounts within the next few weeks.

Unfortunately, many Americans could be in for an unpleasant surprise when they file their returns this year, as some of the key tax breaks that caused refunds to rise in the past two years have gone away. Here's a rundown of what has changed, and what it could mean for you.

Some valuable tax breaks went away for the 2022 tax year

In response to the COVID-19 pandemic, Congress passed several valuable tax breaks designed to help American families weather the economic disruption caused by the pandemic.

The biggest benefits were directed at families with children. The Child Tax Credit, which is normally worth up to $2,000 per year, per child under 17, was expanded to $3,000 for children under 18 or $3,600 for children under six for the 2021 tax year.

The Child and Dependent Care Credit, which helps offset childcare expenses, will also drop back to its pre-pandemic level, as will the Earned Income Tax Credit, or EITC. In fact, the maximum Child and Dependent Care Credit was $8,000 in 2021. For the 2022 tax year, it was just $2,100. Eligible taxpayers with no children could receive a $1,500 EITC in 2021, but this is dropping back to $500 for 2022 and beyond.

There was also a special tax break for charitable deductions in 2020 and 2021. Charitable contributions are typically only available for taxpayers who itemize, but a special rule allowed up to $300 in deductible contributions ($600 for married couples) even if they took the standard deduction.

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Finally, there have been no economic impact payments, also known as stimulus checks, since 2021. While these were typically given as separate payments, many taxpayers who didn't get them directly deposited received them as a credit on their tax refund instead.

Small business owners also received some temporary tax breaks, such as the ability to defer some of their 2020 self-employment taxes, and the ability to claim a credit for work missed due to the pandemic. But these have also gone away.

Will your tax refund be smaller in 2023?

The short answer is "it depends." But it's fair to say that on average, tax refunds will be significantly smaller for the 2022 tax year than they were in 2021. The average tax refund for the 2021 tax year (the return you filed in 2022) was $3,176. Now, because most tax breaks are returning to pre-pandemic levels, it's reasonable to expect the average tax refund to gravitate back towards the $2,549 average for the 2019 tax year.

That's the average. Some taxpayers might not be affected at all and could even end up with higher refunds in some cases -- for example, if you have investment losses to report due to the poor stock market performance in 2022, while you previously had investment gains in 2021 when the market was strong. But it's likely that many households, especially those with children, will see significantly smaller tax refunds this year, and some could even unexpectedly end up owing money.