Why This Tax Expert Thinks 2023 Could Be the Year of ‘Refund Shock’

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Some filers may end up unhappy with their refunds. 

Some people are used to filing a tax return and seeing a refund hit their bank accounts weeks later. And if you’ve consistently gotten a refund from the IRS year after year, then you may be anticipating a nice payday this filing season, too.

But Mark Steber, Chief Tax Information Officer at Jackson Hewitt, warns that tax refunds may be smaller this year than they were last year. In fact, he cautions that 2023 could be the year of “refund shock.” Here’s why.

No more enhanced credits to fall back on

In 2021, the Child Tax Credit got a major boost. Its maximum value rose from $2,000 to $3,000 for children aged 6 to 17 and $3,600 for children under age 6.

Plus, the credit became fully refundable instead of only being partially refundable. With a fully refundable credit, you can get paid its entire value, even if you owe the IRS no money. That helped boost refunds for a lot of tax-filers last year (keeping in mind that 2021 taxes were filed in 2022).

But in 2022, the Child Tax Credit didn’t get a boost. Its maximum value didn’t increase and its full value wasn’t refundable. And that’s just one reason why tax refunds may be lower this year.

Another reason? Many people picked up side hustles in 2022 to cope with inflation. But many people may also not have known to pay estimated taxes on that income if it was paid on a freelance basis. So that, too, could result in lower refunds in 2023. Worse yet, it may even result in more tax-filers owing money to the IRS.

Now to be clear, owing money isn’t actually a bad thing in theory. It means you didn’t overpay your taxes but rather, got to keep more of your earnings as you went along.

But owing money becomes a problem when you don’t have the means to pay. And since inflation cost a lot of people extra money last year, many filers may not have the cash in savings to pay their tax bills.

How to cope with a smaller tax refund or IRS bill

The average tax refund in 2022 was $3,121. If you received a payday along those lines last year, you may be in line for a similar refund this year. Or, your refund might come in a lot lower. You may even end up having to write the IRS a check.

If you owe money on your taxes you can’t pay in full right away, don’t panic. Steber says the IRS tends to be pretty flexible about getting its money, so you’ll most likely be able to get on some type of installment plan that allows you to pay your tax bill over time.

Meanwhile, if your refund ends up being lower than expected, you may have to adjust some habits or plans to cope. If, for example, you were counting on a refund in the ballpark of $3,000 and were planning to use it to pay off your holiday credit card debt, you may have to come up with another strategy if your refund only amounts to $1,500. Similarly, you may have to swap your island vacation for a less expensive getaway.

That’s why you may want to file your taxes as early as possible this year. The sooner you do, the sooner you’ll know how much of a refund to expect — or how much money you owe the IRS. And from there, you can at least formulate a game plan.

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