Why You May owe taxes This Year or Get A Much Smaller IRS Tax Refund in 2023

Over the last few years, thanks to plenty of pandemic related support via stimulus payments and funding for expanded tax credits, the average refund payment ballooned to over $3,100. This is despite 20 million fewer Americans getting refunds.

However with no further federal funding approved, several popular family and dependent tax credits that were expanded in 2020 and 2021 will return to pre-pandemic (2019) levels. This will generally mean you will owe taxes for your 2022 filing or lower a much lower refund payment, all other things being equal.

But there are other reasons why your refund may look drastically different this year.

Reduced Pandemic Tax Credits

The IRS recently confirmed this, and in particular will be felt by taxpayers who claimed the much larger Earned Income Tax Credit (EITC) or the expanded Child Tax Credit (CTC). Specifically:

The Child Tax Credit (CTC) will drop to $2,000 per year, versus $3,600 per dependent in 2021. Further only a portion of the credit (Additional CTC component) can be claimed as a refundable amount if the full CTC cannot be applied against taxable income

The Earned Income Tax Credit (EITC) for Single filers with no children will only get $500 vs $1,500 in 2021. Other thresholds for 2022 and 2023 increased in line with standard annual inflation adjustments (see the latest EIC thresholds)

Another popular credit, the Child and Dependent Care Tax Credit (CDCTC), which allows you to offset qualified dependent care expenses, returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021. Income phase thresholds also returned to pre-pandemic levels.

Based on various sources and pre-pandemic figures, it is expected that the average federal tax refund will be around $2500 in the coming year. The average state tax refund will also likely fall by 20 to 30 percent.

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Side Gigs and Hustle Income Tax

During the pandemic with people at home or facing risks with their employment, millions of Americans started a side-gig or side-hustle to earn some extra income.

Some of these business’ started doing quite well and unless you paid estimated taxes, the self-employment income you had from these “jobs” could mean you owe a lot more in taxes when you file in 2022.

In some cases, your tax liability from self-employment (declared via Schedule C on your 1040 filing) could outweigh your other withholdings and credits, meaning you will have a tax liability rather than receive a refund.

Adjust Your Paycheck Withholding

While it’s always nice to receive money from the IRS, rather than paying them, a refund is basically a free loan to the IRS via overpayment of your taxes through the year. If you are consistently getting a larger than average refund, chances are you are withholding too much in taxes from your paycheck or other income sources.

To correct this and in essence get your refund payment through the year, adjust your paycheck withholding. You can find many withholding calculators online, including at the IRS.

Once you estimate your correct withholding submit an updated form W4 to your employer’s payroll department and enjoy your larger take home pay when the next pay period rolls around.

2021-2022 Tax Season Refund Information

The IRS recently published statistics on the last tax season which showed the large spike in the average refund to nearly $3,300.

This will likely be lower in the 2022-2023 tax season, with many folks going from getting a refund to having a tax liability.

2022 IRS Tax Season Statistics
2021-2022 IRS Tax Season Statistics

2020-2021 Tax Season Refund Information

For the 2020-2021 tax season, here were some observations.

  • If you got a refund this year, chances are that it was higher than the one you received in 2020. The average tax refund amount paid by the IRS through the end of December 2021 was $2,815, or $269 higher than the prior corresponding period
  • While direct deposit is by far the fastest way to get your tax refund, it is also looks like the more rewarding with the average direct deposit refund coming in at: $2,879.
  • Of the 152 million tax refunds e-filed, nearly 85 million were done via a tax professional, vs about 67.5 million being self-prepared. Despite the abundance of tax filing software, it seems like more people like the comfort of a tax professional when filing their returns. Given the number of new tax credits/deductions, delayed payments and complexity of the US tax code, this is not surprising.
  • The IRS website usage continued to grow as getting hold of a live agent proved to be very hard. More and more ta payers also use the IRS website and portals to update payment details for stimulus checks and the advance child tax credit (ACTC)
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4 thoughts on “Why You May owe taxes This Year or Get A Much Smaller IRS Tax Refund in 2023”

  1. Thank you so much for your “words of wisdom.” You make difficult topics easier to understand and I thank you very much for this.

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  2. I just wanted to say thank-you Andy; all your articles help so much and I wouldn’t have got through the covid unemployment without you.

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  3. Good suggestion on the withholding adjustment for taxpayers getting large refunds. I’d add considering setting up at the same time an automatic paycheck deduction to a savings account to keep ‘take home pay’ about the same after the withholding drops. At the end of a year, the savings account balance will have ballooned to about the magnitude of last year’s tax refund. Except it’s in the taxPAYER’s account, not the taxCOLLECTOR’s!

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