A tax refund is a welcome windfall for many Americans, but you may not reap as much as you did in recent years. It’s possible you could owe Uncle Sam money when filing 2022 returns.
As of mid-February, the average tax refund totaled $3,140, according to the Internal Revenue Service. That’s an 11 percent drop from 2022 when the average refund was $3,536.
What’s changed? Well, the generous tax credits that were expanded to support families during the pandemic have expired. The child tax credit that was available to Americans who met certain income criteria credit topped out at $3,600 per child in 2021. Eligible families are now offered a maximum credit of $2,000 per child.
The earned income tax credit was about $1,500 in 2021. For 2022, eligible taxpayers with no children will receive a maximum credit of $560, according to the Internal Revenue Service. The Child and Dependent Care Credit, a tax break for individuals who are working while also caring for a child or dependent with disabilities, will also revert to pre-COVID levels and taxpayers who opted for the standard deduction when filing 2021 taxes were allowed to claim an above-the-line $600 charitable donation. However, for tax year 2022, taxpayers can no longer claim charitable contributions.
There are, however, several ways you can maximize your refund, or at least reduce the amount of money you owe the IRS. According to Cheryl Prout, partner at the Top 50 Accounting Firm The Bonadio Group, the key is to defer income and tax advantage of tax deductions and credits.
Tax credits
There are a variety of tax credits available that can increase your refund or reduce what you owe. They tend to change annually. The aforementioned child tax credit, child and dependent care credit and the earned income tax credit can boost your bottom line.
There are a lot of new credits, Prout said. “A lot has to do with energy credits.”
There are a number of new enhanced credits and tax credits as part of the Inflation Reduction Act of 2022, particularly for those who purchase electric cars. If you bought a new, qualified plug-in electric vehicle in 2022 or prior, you may be eligible for a vehicle tax credit of up to $7,500.
Energy credits are also available for improvements made at home. If you purchased new energy-efficient windows, doors or appliances you may qualify for a credit, though there are limitations.
Tax deferrals
One of the simplest ways (I say that with a laugh because we are talking about taxes, after all) to reduce your taxable income is to defer the tax effects to some point in the future, Prout said.
One very common way to defer income is to put it into a retirement plan. When you postpone income to a later year, you’re investing money you would otherwise have to pay taxes on and minimizing your current tax liability. It’s possible that when you do tap into that income at a later date you’ll be in a lower tax bracket.
“Deferring is typically a very good way to increase your tax refund now since you are deferring income and reducing taxes overall,” Prout said.
Small business owners and self-employed individuals can defer income to a subsequent year. Say you make a delivery this year – you can postpone receipt of that income until the following year.
Tax deductions
Deferrals will reduce taxes paid in the year of deferral, but increase taxes paid at a later date. Deductions, on the other hand, will reduce taxes paid in the year they are taken.
Maxing out health savings account contributions is one way to earn a sizable tax deduction. You can claim a tax deduction for contributions you make to your HSA. Money withdrawn from the account will never be taxed. Plus, all interest earned won’t be subject to taxes unless it is used for non-eligible medical expenses. The annual inflation-adjusted limit on HSA contributions is $3,850, up from $3,650 in 2022, according to the IRS.
Accelerating medical expenses or charitable contributions into the current tax year you can also increase tax deductions and reduce taxable income.
Contributing to a 529 college tuition savings plan is another form of tax deferment. Contributions are made with after-tax dollars and grow free of federal and state income taxes. Plus, you won’t have to pay taxes on the money you withdraw as long as it’s used to pay for qualified higher education expenses. Contributions of up to $5,000 per individual or $10,000 per couple are also tax deductible in New York state.
“As opposed to a credit, it is an actual dollar-for-dollar reduction of the tax,” Prout said. “You get a bigger bang for your buck.”