Ask Chuck: Tax refunds expected to be lower

Dear Chuck,

We usually pay down Christmas debt with our tax refund, but I am worried we will not get as much back this year. What can we expect?

Waiting for Our Tax Refund

Dear Waiting for Our Tax Refund,

You are correct; changes to the tax laws are underway, so resetting expectations for a refund is in order. Last year’s average tax refund was almost $3,200. Unfortunately, the typical tax refund this year could drop to $2,700, which is approximately what taxpayers received in 2021 for their 2020 taxes. Many tax filers will be disappointed. Do not assume that last year’s refund is what you will receive this year.

Changes in filing 2022 return:

• Charitable giving will not receive an extra deduction.
• Standard deductions have increased.
• Income tax brackets have shifted.
• The Child Tax Credit (CTC) is reverting back to $2,000 per child.
• Income thresholds drop for child and dependent care credit.
• Earned income tax credit shrinks for childless taxpayers.

These changes may surprise many who expect a refund or those who received refunds last year. The Coronavirus Aid, Relief and Economic Security Act (Cares Act) was not renewed in 2022. As a result, some tax credits and deductions are reverting back to pre-2021 levels. This may negatively impact portions of the population.

Forty percent of households will pay no federal income tax for 2022. Basically, they are anyone whose income is less than the standard deduction — those whose gross income for 2022 is less than $12,950 for single filers, $19,400 for heads of households, or $25,900 for married couples filing jointly. Filing is required for those who have $400 or more in net self-employment income. Standard deductions are limited for those claimed as dependents on someone else’s tax return. Those who are at least 65 or blind get to claim an extra standard deduction of $1,400 or $1,750, depending on filing status.

Prepare now to maximize your return

• Gather necessary documents.
• Set aside time to fill out forms.
• Seek help from trusted individuals or an accountant.
• Refer to this tax prep checklist as well as this one.
• IRS steps to filing.
• Cryptocurrency tax information.
• How to file an extension.
• Stock losses and capital gains information.
• Income tax deadlines in 2023.
• Adjust your withholding status.
• Avoid these common tax myths.

Results of failing to pay income taxes

• A summons from the IRS.
• Penalties and interest.
• Loss of state tax refund.
• Federal payments could be withheld.

Why pay?

We pay taxes to help fund all levels of government. Federal income tax is our national government’s largest single source of revenue. This chart compares federal spending with revenue. We may not agree with the way tax money is spent. However, as disciples of Christ, we can look to His example. Matthew 22 records a time when the Pharisees tried to trap Jesus with a question about taxes:

“‘Tell us, then, what you think. Is it lawful to pay taxes to Caesar, or not?’ But Jesus, aware of their malice, said, ‘Why put me to the test, you hypocrites?Show me the coin for the tax.’ And they brought him a denarius. And Jesus said to them, ‘Whose likeness and inscription is this?’ They said, ‘Caesar's.’ Then he said to them, ‘Therefore render to Caesar the things that are Caesar's, and to God the things that are God's.’ When they heard it, they marveled. And they left him and went away” (Matthew 22:17–22 ESV).

Likewise, the Apostle Paul said to submit to authorities and pay taxes to whom they are owed in Romans 13:1–7.

Paying off debt with a tax refund

Paying down consumer debt is a good use of income tax refunds. Besides paying off your Christmas debt, why not make 2023 the year you decide to avoid consumer debt altogether? If you pay your credit card bills every month, you can avoid the expense of high interest. By intentionally cutting your spending now, you can chop away holiday debt and use the refund (if you get one) to save or invest. 

Have you considered starting a Christmas fund? You can make automatic deposits to an account specifically designated for Christmas 2023, or you can deliberately adjust your gift-giving to avoid spending more than you earn. This is possible by drawing names, planning ahead to make your own meaningful gifts, or buying them when on sale. Do you have an emergency fund? This should take priority over a Christmas fund.

Don’t forget to check with Christian Credit Counselors if you cannot manage your debt repayment this year. Thanks for the question!