Will tax refunds be smaller in 2022?

The Internal Revenue Service is already warning people that their 2022 refunds may be less than their refunds from the last two years since many of the pandemic tax benefits — like the expanded child tax credit, child and dependent care credit, and stimulus payments — ended in 2021.

time.com - Why the IRS Is Warning Taxpayers About Smaller Refunds Next Year ...

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Editorial Independence We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money. If you’re banking on a tax refund from the government next year, it might be smaller than you expect. The Internal Revenue Service is already warning people that their 2022 refunds may be less than their refunds from the last two years since many of the pandemic tax benefits — like the expanded child tax credit, child and dependent care credit, and stimulus payments — ended in 2021. The average tax refund in 2022 was slightly more than $3,000. And if you tend to owe come tax season, you might owe a little bit more in 2023 because you won’t be eligible for as many credits, according to Krystal Todd, a CPA and popular personal finance figure on TikTok. “Last year, people probably saw a noticeable jump in their tax refunds, and you will not have that this year,” Todd says. “A lot of things going on during COVID have been brought back down for the most part to 2019 levels.” It’s especially important to get ahead and prepare before filing your taxes next year because of all the recent tax changes. Not only are many of the pandemic tax benefits reduced or gone, but the IRS also updated dozens of tax provisions this year, some of which raise standard deductions and income limits in tax brackets for individuals and couples filing jointly. Depending on your tax situation, preparation is key to ensure you get the largest tax refund or lower your tax bill if you know you’ll owe Uncle Sam. While taxes aren’t due for a few months, taking these tax-reduction steps now could pay off in April.

Gather Your Tax Documents and Get Organized

Simply gathering your tax documents ahead of time and getting organized can make for a more accurate and less stressful tax return. It helps avoid errors that slow your refund and may also help you find overlooked deductions or credits. “Don’t wait until the last minute,” Todd says. “I’ve done that before. It sucks, so I would advise against that.”

These are a few common tax documents you’ll want before filing:

W-2 from your employer(s)

Forms 1099 (including 1099-MISC, 1099-INT, 1099-K) for miscellaneous income, including retirement plans and banks. You may receive multiple 1099s — for instance, for any interest you earned on a savings account, income earned as a gig worker, or unemployment benefits you received. You may receive a 1099-K form if you were paid more than $600 on third-party apps, such as Venmo or PayPal, for part-time work, side jobs, or selling goods or services.

Form 1098 for mortgage interest statements

Records for any stocks or other investments that you sold in 2022, including crypto transactions or other digital assets

Form 1095-A if you purchase health insurance through the Health Insurance Marketplace

Form 1098-T if you had higher education expenses

Any other important IRS letters or notices

Your W-4 is another important document to be aware of when preparing to file taxes. It’s what your employer uses to withhold taxes from your paycheck, and you can use it to increase or decrease your withholdings depending on your circumstances. The key to paying the right amount of federal tax throughout the year is to update your W-4 regularly. If you count on a big tax refund every year, consider reviewing your W-4 and current withholding with your employer as soon as possible. A big refund from the IRS may seem great in the moment, but it isn’t the most effective use of your money, experts say. You’re essentially giving the IRS an interest-free loan, which is money you could have otherwise saved, used to pay down debt, or invested throughout the year. Use the IRS’ Tax Withholding Estimator tool to estimate how much federal income tax you should withhold.

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Estimate Your Tax Bill

Once you’ve gathered your documents, take some time to review them thoroughly, says tax expert Lisa Niser. This will help determine how much you owe the IRS or how much you can expect to receive in a refund. A large refund from the IRS may seem like an advantage, but it isn’t the most effective use of your money, experts say. You’re essentially giving the IRS an interest-free loan, which is money you could have otherwise saved, used to pay down debt, or invested. Niser recommends working with a tax professional to create an accurate projection for your 2023 taxes, especially if you have a complex tax situation. You can find qualified tax professionals through the IRS’ portal. If your taxes are simple, there are also several free calculators online that you can use to get an estimate, such as the IRS’ Tax Withholding Estimator tool or HRBlock’s tax calculator. Knowing the amount of taxes you’ve already paid can help you address potential issues immediately. “The biggest challenge is that people are surprised by their taxes,” Niser says.

Create an Account with the IRS

If you don’t already have one, create an online account with the IRS to securely access the latest information available about your tax records, including your most recently filed tax return. You’ll also be able to view your tax owed, payments, and payment plans, as well as sign power of attorney authorizations electronically from your tax professional. It’s important to ensure your address is current and accurate with the IRS and on all your tax paperwork to avoid any possible mistakes when filing. “Because everything is electronic, a lot of people don’t go in and check their address if they’ve moved,” Niser says. “The fact that you don’t get something does not give you permission to not report it.” Another thing that Niser recommends taxpayers do is to get an identity protection PIN through the IRS. You can sign up for it for free on the IRS website, and it protects you if someone fraudulently submits a tax return using your Social Security number. You may have to wait until January to get an identity protection PIN, but to Niser, it’s worth getting when the time comes. “Because it’s more challenging to get through to the IRS, I think that’s just smart,” she says.

Reduce Your Taxable Income

It’s not too late to reduce your taxable income for the year, and it could significantly enhance your refund or trim your tax bill in 2023. Todd says you do this in several ways, but two methods stand out: Diverting your income to your retirement accounts and deducting business expenses if you’re an entrepreneur. Front-loading your business expenses for next year and maxing out your retirement account contributions are reliable ways to reduce your taxable income for the current year. What you might not realize is that spending that money can bring you a double benefit for your business. Not only does it help you grow your business, but the money you spend can be deducted from your business income. Business expenses are generally deductible if they are “ordinary and necessary,” and you have receipts as evidence to give to the IRS. For example, instead of buying necessary materials or paying subscriptions a month at a time for your business, bulk order things or pay the annual fee in December so that you’ll be able to use those goods and services for 2023.

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The same concept applies to retirement contributions. Contributing as much as possible to your retirement funds like 401(k) accounts and IRAs before filing will not only trim your taxes in 2023 but also allow you to build long-term savings. Contributions to a 401(k) are generally due by the end of the calendar year, so you’ll have until the end of December to hit $20,500 for 401(k) contributions ($27,000 if you’re age 50 or older). That number does not include employer contributions. For traditional or Roth IRAs, you have until April 18 to contribute the maximum for 2022, which is $6,000, or $7,000 if you’re 50 or older. It’s been a rough year for the stock and crypto markets, and if it’s unclear if market conditions will improve in 2023. If you’re investing for the long haul, you should never sell because of short-term volatility and noise in the market. But there is one upside if you did already sell investments that you lost money on this year, especially crypto investments —it’s called tax loss harvesting. This popular investing strategy allows you to realize capital losses from investments you sold and offset any capital gains. Those losses at first will get netted against each other, but to the extent that you have more losses than you do gains, it will start to count against your regular income as well — up to $3,000. Any additional losses can be carried over to lower your taxes in the future, and you can reinvest any money from the sale into other investments. “Capturing those losses is another way to reduce your taxable income,” Todd says. The only catch is the wash-sale rule, which requires you to wait at least 30 days before you can buy the same or a “substantially identical” investment. If you don’t follow the rule, you won’t be able to claim a capital loss for that investment, and it won’t benefit you come tax time. Bookmark the following links when it’s time to do your taxes. These online resources and tools through the IRS are free, easy to use, and available anytime. Use them to help file and pay taxes, check the status of your refund, or get answers to your tax questions.

time.com - Why the IRS Is Warning Taxpayers About Smaller Refunds Next Year ...

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