Why Is My Tax Return So Low in 2023?

The last two years were crazy year for everyone, with the pandemic affecting nearly every aspect of life. However, as the country has been returning to normal, it has also meant the end of a lot of Covid-era programs that boosted tax refunds over the last two years. As a result, many Americans will be seeing a much smaller tax refund this year.

The average tax return last year was $3,039 according to the IRS. That was up over $400 from the prior year - highlighting the impact of the Covid-era stimulus.

But sadly, due to many of the new and expanded programs ending, tax refunds will be smaller for many (and could be delayed too - check out our Tax Refund Calendar). Even worse, many could find themselves owing taxes when they’ve never had to owe before. Here’s why there's a good chance your tax refund is going to be smaller this year.

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Child And Dependent Care Tax Credit

Tax Refund Reduction: $5,000 to $10,000

One of the biggest expansions in tax credits came through the Child and Dependent Care Tax Credit. In 2021 (so when you filed your taxes in 2022), there was a huge increase in the amount of the tax credit, the income levels were higher, and the tax credit was fully refundable (meaning you could get more refunded to you than you even made).

However, for 2022, this credit reverts back to the original rules - meaning millions of families nationwide will see much smaller tax refunds.

Last year, the following rules applied:

• You could receive $8,000 for one qualifying person and $16,000 for two or more qualifying individuals
• The percentage of qualifying expenses increased to 50%
• The phase-out income started at $125,000 AGI and capped at $438,000 AGI

However, this year, the limits are much lower. The following rules apply for 2022 (which will reflect on your 2023 tax return):

• You can receive $3,000 for one qualifying person, and $6,000 for two or more qualifying individuals
• The percentage of qualifying expenses is 20% to 35%
• There is no longer an upper limit for income to claim the credit

Taxpayers with two children who qualified could see a reduction of $10,000 in tax credits ($16,000 in 2021, and only $6,000 in 2022). 

Child Tax Credit

Tax Refund Reduction: $1,000 to $1,600

The Child Tax Credit was another huge expansion to tax credits in 2021 that will revert back to their pre-Covid levels.

In 2021, you could receive the following for the Child Tax Credit:

• $3,600 for children 0 to 5
• $3,000 for children 6 to 17

Furthermore, some of these payments were sent out monthly, making the tax credit even more confusing last year.

However, for 2022, the Child Tax Credit reverts back to the original rules:

• $2,000 for all children under 17
• Only $1,500 of the tax credit may be refundable
• You must have an AGI of $200,000 or less for single, or $400,000 or less for joint returns or the credit phases out in $50 increments

The result of this change is that 17 year olds are left out of the credit again. Furthermore, everyone else is seeing a reduction of $1,000 to $1,600 in the tax credit.

Related: What To Do If My Parents Claimed Me On Their Taxes?

Earned Income Tax Credit (EITC) Changes

Tax Refund Reduction: Up To $6,935

There are also changes to the Earned Income Tax Credit (EITC) in 2022 that could reduce the tax refund for young adults and other low income individuals.

In 2021, the EITC was expanded in two ways: the minimum age limit and the adjusted gross income limit.

• The minimum age to claim the credit in 2021 was 19, but in 2022 it goes back up to 25
• The maximum AGI for filers with zero dependents is reduced by $4,950 from 2021 to 2022

The maximum credit allowed last year was:

• No Children: $1,502
• 1 Child: $3,618
• 2 Children: $5,980
• 3 or More Children: $6,728

Furthermore, in 2021 you were allowed to use your 2019 income to boost the EITC, but that's not allowed in 2022 (for tax filing in 2023).

Now, this year, the credit amounts vary:

• No Children: $560
• 1 Child: $3,733
• 2 Children: $6,164
• 3 or More Children: $6,935

As you can see, this change will impact those under 25, and those with no children. In a worst case scenario, it could see a total elimination (if you're under 25), or if you have no children you could lose $942 in tax credits.

No Student Loan Interest

Tax Refund Reduction: $250 to $550

A popular tax deduction for the 43 million Americans with student loan debt is the student loan interest deduction. To claim this deduction, you must pay at least $600 in student loan interest during the tax year. You can only deduct up to a maximum of $2,500 in interest paid.

The student loan interest deduction is an adjustment of your gross income. So if you earned $60,000 and paid $2,500 in student loan interest, you’ll only pay taxes on $57,500.

However, due to the Covid-19 Student Loan Forbearance, federally-held student loans have been paused for all of 2022. These loans have had no payments, and interest has been 0%. As such, most Americans with student loans haven’t paid any interest for the entire year.

The result? You might not qualify to deduct any interest on your taxes - thus increasing your tax bill.

Related: What To Do When Your Student Loans Unpause After Covid-19 Forbearance

Recovery Rebate Credit (Stimulus Checks)

Tax Refund Reduction: $1,400

2021 was the last year that you could have claimed the Recovery Rebate Credit (also known as the stimulus checks) - which could have added $1,400 to your tax refund. You would have filed your tax return in 2022 to claim any missing stimulus check credits that were due from 2021.

However, there was no Federal stimulus checks for 2022.

A Rise In Side Hustles

With rising inflation and concerns about the economy, our latest survey revealed that 55% of Americans currently have a side hustle, and another 16% are actively looking for one.

Unlike working a job and getting a paycheck, income earned from gig economy work or through self-employment isn’t subject to any tax withholding. Instead, you report your income and expenses at tax time and pay the IRS any tax due.

Sadly, with most people working these gigs because they urgently needed the money, many may not have set any aside for taxes. If you didn’t earn a lot of money (or none at all), you won’t owe much if anything. But if you were making good money on the side, you could have a substantial tax bill.

Plus, starting this year, the IRS is requiring payment processors like Venmo and PayPal to send 1099-K forms to everyone who received over $600 in income (the previous cutoff was $20,000 in transactions). This will force side hustlers to report more income than they may have previously. 

How To Reduce Your Side Hustle Tax Liability

Before you freak out, make sure that you are properly accounting for both your income and your expenses. As a freelancer or self-employed person, you do have to claim your income, but you also get to deduct any expenses related to that work.

For example, if you’re delivering for Doordash, you would have the following expenses: mileage (58.5 cents per mile for 2022 driving through 6/30/2022, then 62.5 cents per mile through the end of the year), a percentage of your phone and phone service (maybe 50%), phone accessories you use (like a charger in your car), and other accessories you need for work.

So, if you made $5,000 driving food delivery, that would be your income. But let’s say you drove 5,000 miles on your vehicle to make that money. You would deduct your mileage expense ($0.625 x 5,000) of $3,125, 50% of your cell phone bill which is $300, and $50 in supplies.

After your mileage deduction, you would actually only owe taxes on $1,525 in income. You can then look at your tax bracket and see how much you would owe. If you find yourself owing taxes and can’t pay, the worst thing you can do is avoid it. Check out this guide on what to do if you owe the IRS money.

Self Employed Sick And Family Leave Credit

Tax Refund Reduction: Up to $17,110

The Families First Coronavirus Response Act (FFCRA), passed in March 2020, allowed eligible self-employed individuals who, due to Covid-19 were unable to work or telework for reasons relating to their own health or to care for a family member to claim refundable tax credits to offset their federal income tax. The credits were equal to either their qualified sick leave or family leave equivalent amount, depending on circumstances.

There were three different tax credits:

• Up to $5,110 for Sick or Family Leave for their own illness
• Up to $2,000 to care for someone with Covid
• Up to $10,000 to care for children due to school closure

The last day to  be eligible to claim this tax credit was March 31, 2021. As a result, this tax credit was totally eliminated in 2022. 

For self-employed business people that were out sick with Covid in 2022, there is no tax relief to help offset lost income.

Investment Gains

It's important to remember that if you sold stocks, crypto, or NFTs last year, you're going to owe taxes on your gains. And if you went all in on meme stocks and knocked it out of the park, those gains can be very large.

When you have investment gains, you pay capital gains taxes. Here are the capital gains tax rates. If your gains were from investments held less than a year, you pay the short term rate. If you held it longer than a year, the long term rate.

Note: Remember, you only pay taxes when you sell. If you haven't sold, you don't pay taxes. You can also do what's called "Tax Loss Harvesting", which is where you sell losses to offset capital gains.

Important Reminders

Some states may have offered additional stimulus checks or even gas tax or inflation refunds. These new stimulus programs may or may not be taxable. On the state level, these payments should not be taxable, but federally, they may be.

Second, more Americans have been getting unemployment benefits this year. If you're getting the full amount, contact your state’s Unemployment Benefit office to have them start withholding taxes. Otherwise, you may find yourself in a similar situation again next year.

Finally, many student loan borrowers have been getting loan forgiveness this year. While the blanket student loan forgiveness program is on hold due to lawsuits, there are still other initiatives like PSLF. These programs are tax-free federally, but may have state tax issues. Learn more about student loan forgiveness and taxes here.

Final Thoughts

Depending on your tax situation, it's possible that you could be losing upwards of $18,500 in tax credits. While some of these are not going to impact all tax filers, many low and middle-income families will see a sizable reduction in their tax refund compared to last year.

It will be even worse for families that swing from a tax refund to potentially owing on your taxes.

If you find yourself owing money to the IRS that you can’t afford, speak to a tax professional. Beyond addressing your current situation, you'll want to resolve the underlying issues to avoid future unpleasant tax surprises.