7 Biggest Tax Changes That Could Hurt Your Tax Refund

Season’s greetings! Tax season, that is. The most fiscally focused time of the year is fast approaching. However, if you’re expecting to boost your savings, you could be in for a shock. 

The IRS is warning taxpayers that their refunds “may be smaller in 2023” due to a smattering of changes.

Here are seven changes that could significantly impact how much money you get back.

Getting a tax break for charitable contributions might be a little harder.

In 2020 and 2021, the federal government offered additional tax incentives to donate to charity: above-the-line charitable deductions. Those incentives did not continue into 2022 and the pandemic-era deductions, up to $600 if married and filing jointly, are out.

Taxpayers who take a standard deduction, which is higher this year at $12,950 for individuals and $25,900 for married couples filing jointly, can no longer take an above-the-line deduction for charitable donations. 

That means if you don’t have enough deductions to itemize and you take the standard deduction, you can’t separately deduct your charitable contributions.

The child tax credit, like many other temporary pandemic-era tax breaks, has returned to its pre-pandemic size for qualifying taxpayers: $2,000 (down from $3,600 in 2021) per child.

In addition, the child tax credit is partially refundable, so you’ll get a limited amount back if it’s greater than the taxes you owe. The entire credit can be applied to your tax bill, however.

You’re in for a bit of a surprise if you pay a babysitter, daycare center, or any other kind of care provider for children under 13 or a disabled dependent. 

Gone is the child and dependent care maximum credit of $8,000 that came with the American Rescue Plan Act. The maximum is now only $2,100.

If you qualify, you can claim 35% of $3,000 in expenses for one child or dependent (maxing out at $1,050) for your 2023 taxes. For two or more children or dependents, it’s 35% of $6,000 (maxing out at $2,100).

Cryptocurrencies had an infamously bad year in 2022, capped off by FTX’s brutal collapse and federal charges against founder Sam Bankman-Fried.

As far as the IRS is concerned, digital assets and currencies — bitcoin, dogecoin, ethereum, non-fungible tokens, and so on — are taxed as property because they are not real currency issued by the federal government. 

That means digital assets are impacted by short- or long-term capital gains taxes, allowing you to lower your tax bill by reporting crypto losses to offset gains. 

But as with all capital gains or losses, all gains are taxable but deductions for losses are limited.

A word of warning: Underreporting crypto gains will raise red flags with the IRS. On the flip side of that digital coin, unreported losses won’t be fixed or adjusted by the IRS.

The earned income tax credit, designed to help lower- and middle-income taxpayers, has taken a hit for your 2023 tax filing. 

If you had no kids and were eligible for a credit of about $1,500 last year, that amount has dropped to a max of $560. In addition, income thresholds have increased due to inflation.

Here are the new thresholds:

• No children: $16,480 for individuals ($22,610 for married couples filing jointly)
• One child: $43,492 for individuals ($49,622 for married couples filing jointly)
• Two children: $49,399 for individuals ($55,529 for married couples filing jointly)
• Three children: $53,057 for individuals ($59,187 for married couples filing jointly)

The new maximums for credit:

• No qualifying children: $560
• One qualifying child: $3,733
• Two qualifying children: $6,164
• Three or more qualifying children: $6,935

Income tax brackets have gone up because of inflation. There aren’t massive shifts at play here, but depending on where you fell on the bracket for your previous filing, it could be different this time around.

The marginal tax rate thresholds—the rate you pay on an additional dollar of income—are as follows:

• 37% for incomes over $539,900 ($647,850 for married couples filing jointly)
• 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
• 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
• 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
• 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
• 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
• 10% for incomes $10,275 or less ($20,550 for married couples filing jointly)

Stimulus payments, or lack thereof, are arguably the biggest reason people might see a smaller refund. 

During the 2022 filing season, the federal government issued a third round of $1,400 checks for everyone, and the average refund was $3,176, an increase of almost 14% from 2021.

But if you’re hoping for a little stimulus payment bump on your 2023 refund, you’re going to be disappointed. There were no pandemic-era Economic Impact Payments for 2022.

In addition to smaller refunds, the IRS warns taxpayers not to rely on getting money back by a certain date, despite getting many out the door within 21 days. 

By law, people claiming the earned income tax credit or the additional child tax credit can’t have their refunds issued before mid-February, for example.

If you look forward to your tax refund every year as one of the best ways to boost your bank account, things may be different this time. 

It’s always a good idea to estimate your taxes and your refund and to plan ahead. The last thing anyone needs is a financial surprise.

And remember: The deadline to file your tax return is April 18, 2023.