2023 Tax Refunds Drop by $259 as Pandemic Benefits Expire - What to Expect Next

In 2023, taxpayers are experiencing noticeably lower tax refunds compared to previous years. The primary reason is the expiration of pandemic-related tax benefits, but experts warn this trend of reduced refunds and increased balances owed is expected to persist in the coming years.

Key Insights for Taxpayers

• The average tax refund for the 2022 tax year decreased by $259, now totaling $2,753.
• There is a decline in the number of taxpayers receiving refunds.
• Expiration of Covid-era tax credits significantly impacted refund amounts.
• Revisions to the W-4 withholding form continue to affect refund sizes.

According to the Internal Revenue Service (IRS) data up to April 21, 2023, the average refund dropped due to the end of expanded child tax credits, earned income tax credits, and special charitable deduction allowances introduced during the pandemic.

Mark Steber, Chief Tax Information Officer at Jackson Hewitt, describes this shift not just as 'refund shock,' but more accurately as 'balance due trauma,' highlighting that many taxpayers are now facing unexpected tax bills rather than refunds.

Additionally, there has been a 3.1% decrease in refunds issued compared to last year, and more taxpayers are reporting balances due, with some struggling to pay their tax obligations. This situation is expected to intensify in the next tax season.

Impact of Expired Pandemic Tax Credits

During the Covid-19 pandemic, Congress introduced temporary tax credits to provide relief. These included increasing the child tax credit to $3,000 for children under 16 and $3,600 for those under 6, expanding earned income tax credit eligibility, and adding a $300 charitable contribution deduction.

All these temporary measures expired for the 2022 tax year, resulting in smaller refunds for many taxpayers.

Moreover, changes made in 2020 to the IRS W-4 withholding form, intended to simplify tax filing by eliminating personal exemptions and doubling the standard deduction, have led to lower withholding amounts. This change, combined with the loss of pandemic credits, has caught many taxpayers off guard with smaller refunds or unexpected tax bills.

Decline in Tax Return Filings

The IRS has reported a 1.3% drop in tax returns filed and an 11.4% reduction in total refund amounts issued compared to the previous year. Experts attribute this decline partly to the absence of pandemic benefits, increased fraud prevention measures, and the rise in taxpayers owing balances, which may discourage timely filing.

Taxpayers should prepare for these ongoing changes by reviewing withholding allowances and planning for potential tax liabilities in future years.

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