Many Taxpayers Will See Smaller Refunds in 2023

Concerned that you may see smaller refunds this year on your tax return? You have every right to, because it’s true. Congress has for years used the tax return as a means of providing benefits to taxpayers in need. In addition Congress has provided incentives to stimulate activities in business, as well as addressing environmental issues. So when COVID-19 hit, Congress and many state governments provided tax benefits to help citizens through the pandemic. Because the COVID pandemic-related benefits have come to an end, your tax refunds may be smaller this year, and substantially smaller for many individuals. The following is a rundown of some areas where decreases in federal tax benefits will affect taxpayers’ 2022 tax refunds.

Changes to tax benefits resulting in smaller refunds this year

Child Tax Credit

2021 – Taxpayers with children enjoyed an enhanced and refundable tax credit of $3,000 per child under the age of 18 ($3,600 if under age 6) per child in 2021.

2022 – The credit has reverted to 2020 levels and the maximum credit for 2022 is $2,000 per qualifying child, of which the maximum refundable amount is $1,500 per child in certain situations. In addition, the credit only applies to children under the age of 17.
Non-refundable tax credits can only be used to offset tax liability and any excess is lost. On the other hand, a refundable credit offsets tax liability and any excess is refundable.

In addition, the child tax credit has always phased out for higher income taxpayers. For 2021 the phaseout thresholds were substantially increased as illustrated in the table. However, that increase was for 2021 only and the thresholds have reverted to 2020 levels for 2022.

Child & Dependent Tax Credits Phaseout Thresholds

Filing Status	2022	2021
Married joint	$110,000	$400,000
Married separate	$55,000	$200,000
All others	$75,000	$200,000

Dependent Care Benefits

The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit is a percentage of the dependent care expenses incurred, but those expenses are limited to specific amounts and the taxpayer’s income from working. The credit percentage also declines for higher income taxpayers.  

2021 – The credit was fully refundable, and the credit was a flat 50% of the allowable expenses up to $8,000 for one and $16,000 for two or more qualified individuals. Thus the credit could be as much $4,000 for one and $8,000 for two or more qualified individuals.The 50% credit rate began to phase out when the taxpayer’s AGI reached $125,000, but the rate wasn’t reduced below 20%.

2022 – The credit is not refundable, and the credit rate ranges from a high of 35% to a low of 20% (see table) of the allowable expenses up to $3,000 for one and $6,000 for two or more qualified individuals.

AGI Adjusted Applicable Percentage

AGI Over	But Not Over	Applicable Percent	AGI Over	But Not Over	Applicable Percent
0	15,000	35	29,000	31,000	27
15,000	17,000	34	31,000	33,000	26
17,000	19,000	33	33,000	35,000	25
19,000	21,000	32	35,000	37,000	24
21,000	23,000	31	37,000	39,000	23
23,000	25,000	30	39,000	41,000	22
25,000	27,000	29	41,000	43,000	21
27,000	29,000	28	43,000	No Limit	20

Both the Recovery Rebate and Employee Retention Credit were Discontinued in 2022, Also Contributing to Smaller Refunds

Recovery Rebates

As a means of providing financial assistance to individuals during the COVID pandemic, Congress authorized Recovery Rebate Credits (also referred to as economic impact payments) for the 2020 and 2021 tax years.

2021 – The rebates, which generally were issued by the federal government during the year but which may have been claimed on the 2021 tax return, were:

• $1,400 ($2,800 for joint filers)
• $1,400 per dependent

2022 – There were no rebates

Employee Retention Credit

As the title implies, this is a credit whose purpose was to help employers retain employees on payroll even though the employer’s business was in decline because of COVID.

• 2021 – The payroll credit was 70%of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups.
• 2022 – There is no longer a credit for years after 2021.

As you can see there have been some significant reductions of tax benefits that can have a substantial impact on your refund for 2022. Please contact this office if you have questions or would like to adjust your withholding to alter your refund for 2023.