Are Tax Refunds Really Lower In 2023? Unpacking This Viral Internet Claim
Here's why it *might* be smaller this year (but also why #RefundShock isn’t that shocking).
The internet is up in arms again — this time over upcoming tax refunds. One quick peek at the #RefundShock2022 hashtag, and you'll get the impression that doing taxes this year is more stressful than ever. But are tax refunds really lower in 2023? If you're worried that this will be your first year ever owing money for taxes or that doing your 2022 taxes will somehow lead to financial ruin, take a deep breath. The reality may not be as shocking as you think.
Despite #RefundShock2022 garnering more than 12 million views thus far on TikTok, it's worth noting that not everyone is heeding the warning. According to a recent Credit Karma survey, 29% of Americans expect a higher tax refund this year. They need it, too. Despite a shocking rise in inflation (and the price of literally everything) in 2022, more than two-thirds (68%) of Americans said their financial situation did not improve or stayed the same.
In other words, the cost of living is more expensive, but pay isn't increasing to keep up. Credit Karma's survey also revealed 24% of Americans will rely on their tax refunds for necessities and to simply survive the year.
Will 2022 tax refunds be smaller?
Bad news: Even the IRS has warned taxpayers not to expect giant refunds. Several significant rule changes and tax credit cuts could make Americans disappointed in their refunds.
Good-ish news: That warning might boil down to simply managing expectations after the bounty that came with 2021's tax refund season. Thanks to those 2021 Child Tax Credit bumps during COVID, many families got used to the extra, much-needed money. However, if you had dependents before COVID, you should know exactly what to expect from this year's returns.
Why will 2022 tax refunds be smaller than 2021?
"This year, some Americans may be shocked by how much lower their tax refunds are," says Courtney Alev, consumer financial advocate at Credit Karma. "Pandemic relief measures were delivered by way of tax breaks and child tax credits. They're now expiring and returning to previous levels, which means that if you benefitted from those measures last year, you could be impacted this tax season."
Basically, the real crux of the 2022 tax refund "shock" boils down to "cuts" made to the child tax credit. Those cuts are simply the effect of the expiration of the 2021 child tax credits offered to parents as part of the COVID relief plan. For parents who enjoyed those extra monthly payments in 2021, their refund probably looked the same as it did in 2020 or 2019 (give or take the addition of kids, changes in ages, and changes in parent income, of course). But if you opted out of the payments, your 2021 tax refund was considerably more than the years before. Compared to 2021 alone, 2022's tax refund will now seem shockingly low. Is it, though?
Child Tax Credits Snapshot for the Last Five Years
- 2018 - The maximum amount of the credit is $2,000 per qualifying child.
- 2019 - The maximum amount of the credit is $2,000 per qualifying child.
- 2020 - The maximum amount of the credit is $2,000 per qualifying child.
- 2021 - $3,600 for qualifying children under age 6 and $3,000 for other qualifying children under age 18
- 2022 - The maximum amount of the credit returns to $2,000 per qualifying child, according to NerdWallet
Note: $2,000 is the maximum credit and not the maximum refund. Even if you don't owe any taxes, there's still a maximum refund you're allowed per child. This year, it's $1,500. In 2018, it appears to have been $1,400.
Inflation vs. Tax Refunds
A look at the last five years shows that not much has changed between 2018 and 2022 by way of tax credits and refunds, with 2021 as an outlier. However, it's worth bringing attention to inflation during those five years. The PCE Price Index showed a 13.39% increase between 2018 and 2022. In other words, your tax refunds have stayed mostly the same for the last five years, despite your cost of living increasing by roughly 13%. A 13% raise in 2018's $1,400 max refund would come out to $1,582.
In other words, your refund still isn't keeping up with inflation. Whether it should or not could be debated by experts well into the next century.... when you'll likely still only get a $1,500 max refund.
A bit of genuine advice: Get help with your taxes. Whether you have one dependent or five dependents, are SAH or WFH, or something in between, taxes can be overwhelming. And there are annual changes that are nearly impossible to keep up with. Yes, you can get your tax form from your local library, fill out all the boxes, and it will likely be correct. But there are better, more modern options.
You can take it to H&R Block and pay someone experienced to do it for you. Many banking and money apps will also do it for you for free and offer audit protection. Credit Karma used to offer free tax filing but now recommends Cash App. You can literally do your taxes on your phone, from your couch, while watching That '90s Show.
You take on enough giant problems every day. Don't try to tackle your taxes on your own simply because that's how your parents did it.