Tax refunds will be nonexistent for some people this year due to changes in the tax code that do away with benefits such as the child tax credit and charitable donations credit.
Tax season has officially kicked off here in the United States, which normally is a time when many citizens look forward to getting a tax refund to spend as they see fit. However, according to tax experts, this year may have a much different feeling than in years past because of some changes made to the US tax code. Instead of money coming back into our pockets, some will receive no refund while others may be in a situation where they owe the government money to clear up their tax liability.
This is alarming news to most of us who saw record inflation throughout 2022 decrease our buying power in the consumer market and higher debt loads bite into our families’ budgets. Financial expert, Lynnette Khalfani-Cox, told NPR, “People should absolutely expect smaller tax refunds this year. And frankly, some people might even owe the government money.”
There are four main reasons that have created this shift in our tax code. The first is that there are no more stimulus checks and back in 2021 many Americans received a $1,400 per person payment from the government which was called a recovery rebate credit that reduced their tax bill and increased their refund. The second factor was the change in the child tax credit where you can no longer count on the $3,200 per child under 6 years old. Due to pandemic legislation that was enacted, it would provide for a credit of $7,200 in the last tax season and this time that family will only be credited $4,000.
The third factor affecting this year’s tax credits is charitable donations, where last year a married couple received a $600 credit for non-itemized donations. Congress failed to extend this credit for this 2022 tax year, which eliminates this as an option for non-itemized deductions, making it more difficult to get credit for non-itemized deductions to your tax bill and impacting the amount of your tax refund.
The last major factor that could affect one’s tax refund is based on investment gains. All sectors saw a down year due to market volatility, many mutual funds were forced to sell their holdings which included profitable holdings. The gains from those profitable holdings create investment gains for investors.
If those investment gains were being held directly by the investor and not in a tax-sheltered account like a Roth IRA then that investor is responsible for investment gains unless they offset those gains by selling off losing stocks to balance out the stocks that were moved that were winners. Khalfani-Cox said, “So yeah, your investment portfolio might have actually declined, but your tax bill nonetheless got bigger.”
Smaller amounts being allowed for standardized deductions on your tax returns, combined with more ways for your tax bill to be increased creates either a smaller tax refund than you have become accustomed to receiving in years past or potentially no refund. The worst-case scenario which also could become a reality for some is receiving a bill that will be due to the Federal Government to settle an unfortunate tax liability. So, if you are making big plans for your tax refund this year, you will want to hold off on those ideas until you see what that tax refund amounts to before making any financial commitments.