Brace Yourself for A Smaller Refund This Year
Updated: Feb 11
As you prepare for the upcoming tax season, be aware of something called “refund shock!” The last two years brought a healthy amount of government stimulus which is now mostly gone! Tax laws have reverted to pre-Covid levels and refunds are expected to be a lot smaller this year.
Refunds of $10,000 or more became common during the pandemic but it’s doubtful that we will see those levels again any time soon. Here are the main reasons why and a list of the provisions that no longer exist:
Economic Impact Payments
You may recall the three Economic Impact Payments of $600, $1,200, and $1,400 per individual. Some lucky taxpayers were even able to double dip. However, there are no more stimulus payments and anything you see stating otherwise is likely “click bait.”
Enhanced Child Tax Credit
The Child Tax Credit is a Bush-era measure that started out at $400 per child which was increased to $2,000 per child in 2017. President Biden temporarily raised the credit as high as $3,600 and expanded the pool to include 17-year-olds. He also made the credit fully refundable. This year, we revert to the old credit of $2,000 which only applies to those 16 and under. Dependents 17 and up only qualify for a $500 non-refundable credit.
Earned Income Credit
This credit has been around since the mid-70’s and presently provides refundable cash assistance to working families making up to $53k. Taxpayers must be between age 25 and 65 to qualify but that requirement has been suspended for the past two years. We were also given the luxury to use prior year income if it generated a larger credit. That is no longer the case and we are once again back to the old rules.
Child Care Credit
Also on the chopping block is the Dependent Care Credit, which was a refundable credit of up to $8,000 for money spent on child-care. This year the credit is reduced to just $1,200 and is no longer refundable.
During the pandemic, a "Page 1" deduction was allowed for the first $300 that each person gave to charity. Additional contributions of up to 100% of AGI could be taken as an itemized deduction. For 2023, that ratio is back down to 60% (30% for private foundations) and nothing is allowed for non-itemizers.
These changes will mean a dramatic decrease in refunds this year. Despite these losses, there are still a few items remaining from the 2018 tax cuts that will remain in effect through 2025. Here is a list of the things that WILL save you money this year:
Enhanced Standard Deduction
This year every taxpayer can earn $12,950 before they must pay (or even file) taxes. The amount is double for marrieds and half again for household heads. In addition, the tax rates will remain at their currently low rate for a few more years.
The American Opportunity Credit pays up to $2,500 per student for your first 4 years of higher education. This credit is partially refundable (meaning you can claim it even if you have no taxable income) and can even apply if you have a scholarship. For students between 19 and 23, the credit can be claimed by either the student or their parents, depending on who is claiming the exemption.
Increased mileage rate
With the increased price of fuel, the IRS has raised the standard mileage rate for business owners. The rate for the first half of 2022 was 58.5 cents per mile increasing to 62.5 cents per mile for the last half of the year and a generous 65.5 cents per mile for 2023.
The credit for adding photovoltaic cells to your home was set to phase out in 2020 but was extended through 2023. This credit is 30% of the cost of the system (including installation) and is not refundable, which means it’s not for everyone. Call your tax advisor BEFORE installing solar to make sure you can benefit from this credit.
Electric Vehicle Credits
Back in 2008 congress authorized $7,500 credit vouchers for the first 200,000 electric vehicles produced by each EV manufacturer. The big companies like Tesla, Ford and GM ran out within months however smaller companies such as Nissan, Volkswagen and Kia still had some left at the end of 2022. For 2023 the credit is back but with a new set of rules. This time the vehicles must be made in the USA and cost less than $55k ($80k for SUVs). And those making over $150k (double for marrieds) will not qualify.
Employee Retention Credit
This last provision only affects business owners with non-family employees who were “affected” by Covid. The lion’s share of our clients who qualify have already applied for this credit. If you haven’t applied and think you think you might qualify, we would love to talk to you! Our rates are the lowest in town and you don’t want to miss out on this generous credit of up to $28k per employee.
The final item of note is that we also have three extra days to file this year. April 16th is a legal holiday, which falls on a weekend and is thus being observed on Monday, April 17th. That pushes the filing deadline Tuesday, April 18th. Of course, we are fans of filing early and if it turns out that you need more time you can always contact us for a free 6-month extension. For a list of what to bring to your tax appointment click here and for an appointment with one of our highly qualified tax advisors, call us at 435-674-9754. We will do everything we legally can to get that refund back up but you can bet that it will still be quite a bit smaller than last year!
This is not intended to be a comprehensive list of tax changes. For a thorough list of rules and how they might apply to you, visit www.irs.gov or reach out to your tax advisor.