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The IRS just warned that your tax refund could be "smaller in 2023" - here are the 2 big reasons why and what you need to do to address them.

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The IRS just warned that your tax refund could be

The IRS just warned that your tax refund could be “smaller in 2023” – here are the 2 big reasons why and what you need to do to address them.

The confetti is out and the glasses of champagne are long gone, but Americans hoping to continue the celebrations until tax time might want to start tempering their expectations.

“Refunds may be lower in 2023,” the IRS noted in a November news release about preparing for the upcoming tax season.

While it may be disappointing that 2023 doesn’t bring heavy tax filing for many households, here’s why and what else you need to know before this year’s filing season kicks off on January 1. 24.

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Why refunds may be lower this year

During the pandemic, the IRS was handing out some pretty large refund checks. In 2022, the average tax refund for the 2022 filing season was $3,176, a jump of 14% from $2,791 in 2021, according to the IRS.

But in 2022, there was no new stimulus checks of the federal government. And some expanded tax credits and deductions, such as for charity donation deductions and child care expenses, returned to pre-pandemic amounts.

In 2020, Congress introduced a new incentive to encourage charitable donations. Taxpayers could claim up to $300 for cash donations (or $600 for married couples filing together), though they didn’t specify — but that provision was not extended for 2022.

Read more: The Best Investing Apps of 2023 for “Once in a Generation” Opportunities (Even If You’re a Newbie)

And families with children will see their child tax credit decrease, as it returns to the pre-pandemic level of $2,000 per child. In 2021, the credit reached $3,600 per child.

Which means the days of oversized refunds are over. But to make matters worse, these small refunds can take longer to arrive in your bank account.

The tax administration, which suffers from a staff shortage For years, he also warned that some returns would take longer. Hoping to get past this, the IRS has warned filers that they shouldn’t expect to receive refunds until a certain date, especially if they plan to use those funds to make large purchases or pay bills.​

A small refund is not always a bad thing

The important thing to understand about tax refunds is that you usually only get them when you’ve overpaid on your annual taxes or withheld more than you owe – meaning a refund is simply the government refunds you the money that was already yours to begin with. . .

The exception, of course, is when you can claim a refundable tax credit on things like heat pumps or childcare.

But you’re probably not a lender, so why would you want to give the revenue agency year-round, interest-free loans? Instead, that extra money could be used to meet your financial goals, whether it’s paying off debt, building an emergency fund, or save for retirement.

The IRS suggests checking your tax deductions at the beginning of the year. Now is the perfect time to grab those pay stubs and review your W-4 forms. Determining if your employer withheld too much money will require some math: you’ll need to add up your deductions for each pay period and subtract your estimated tax payable from the total.

All that’s left is your potential tax gap. From there, if you need to adjust your holdings, you will need to complete a new form.

If your tax situation is more complicated or you don’t know where to start, you might consider talking to a tax professional.

Maybe by this time next year you’ll expect an even smaller refund in 2024.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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