Consumers, already being squeezed by the highest inflation in a generation and facing a possible recession, may not even have a fat tax refund to look forward to in 2023. That’s why it’ll be important to pay even closer attention to your return to ensure you get the tax refund you can, accountants say.
The IRS warned on Tuesday that tax refunds may be smaller because there were no stimulus payments in 2022. Additionally, it noted a pandemic-era exception in 2020 and 2021 that allowed those taking the standard deduction to claim a tax deduction of up to $300 for cash donations to charity hasn’t been extended. The only way, again, to write off gifts to charity is to itemize.
That can be alarming to millions of Americans who rely on tax refunds for large purchases, savings, investments or paying off debt. In 2022, 46% of taxpayers said they were relying on their refunds to do some of those things, a LendingTree survey showed.
Tax experts say, however, that you shouldn't worry yet. “There are still many tax benefits, credits, deductions and many ways to pay the minimum amount of taxes you owe and get the biggest refund you can,” said Mark Steber, chief tax officer at Jackson Hewitt.
What are some basic tax preparation steps to take now?
Get organized. “You do not have to be super-organized with a file cabinet and records valet,” Steber said. “A simple method of shoebox or large envelope will work. Simply being organized can help make a more accurate and less stressful tax return.”
Organize your information into four simple sections:
Deductions and credit items
Last year’s tax returns
Prepare your help. Taxes can be complicated and difficult to understand, so make sure you or your tax professional leverage good tax technology when doing your return. If you use a professional, make sure the person is trusted, trained and experienced.
What are some tax changes you need to know this year?
People who have part-time work, side hustles, or just sell the occasional goods on Etsy or eBay will need to be vigilant for Form 1099-K. Anyone who sells $600 or more in a calendar year of services or goods and accepts payments using third-party networks, such as Venmo, PayPal or debit or credit cards, will receive a 1099-K with these transactions, and you must report this income or risk an automatic IRS notice or even an audit, said Ryan Losi, executive vice president of PIASCIK, a certified public accounting firm.
This change came from passage of the American Rescue Plan Act of 2021. Before that, the reporting threshold was for taxpayers with more than 200 transactions worth an aggregate above $20,000.
Gifts to charity can be written off only if you itemize your deductions. This contrasts with the last two years, when those taking the standard deduction could claim a tax deduction of up to $300 for cash donations to charity.
Tax benefit if you can get it: IRS raises 2023 retirement savings cap, but few even hit it. Here's what you can do about it.
What are some tips to lower your tax bill or get a bigger refund?
Check eligibility for the premium tax credit, a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. A refundable credit means that if the credit exceeds the amount of taxes owed, you’re refunded the difference.
For tax years 2021 and 2022, eligibility was temporarily expanded by eliminating the rule that a taxpayer with household income above 400% of the federal poverty line cannot qualify for a premium tax credit. If you received unemployment compensation at all during the year, your income automatically qualifies.
Check eligibility for the clean vehicle credit. Until Dec. 31, buyers of certain electric vehicles can benefit from the federal tax credit of $7,500.
Harvest losses. Go through your investment holdings and you’re likely to find some losses this year. If you sold at a loss, you can use that to reduce your taxable capital gains and possibly offset up to $3,000 of your ordinary income.
"If you have more losses, the excess will carry forward and you can use it next year,” Losi said. Just remember to use them, he said.
How early should I file my taxes?
It's advice accountants give every year: File as early as you can once tax season opens, typically in late January. Here’s why, according to Steber:
Typically, 3 out of 4 taxpayers get a refund each year, and 2022 will probably be the same. So, file early, get your money early – it's that simple
If you file early, you lock up your personal data with the IRS and states, so no one can file a fake tax return and try to steal your refund
If you file early and your tax professional finds another deduction or credit that might need some new or more data, you have time to get those records and won’t be up against a last-minute deadline
If you owe money and file early, you can still pay at midnight on the last day when taxes are due and still file your tax return and protect your data. Filing your taxes and paying your taxes don’t have to be done at the same time.
The IRS warned this week that taxpayers shouldn't rely on receiving their refund this year by a certain date, especially when making major purchases or paying bills, because some returns may require additional review and may take longer.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Tax refunds may be smaller this year. How to ensure you get every dime