Image source: Getty Images
If you’ve already filed your taxes for 2023, you may have done it because you were expecting a refund. After all, you may be relying on it to pay an important bill. But there are many reasons that you might not have seen the refund you were expecting. And if it feels like a trend, it’s not difficult to understand why.
According to the IRS, the average tax refund for the 2022 tax year was $1,963, which represents a 10.8% decrease compared to the previous year. This may have been due to the reduction of certain pandemic-era tax credits, like the Child Tax Credit and the Earned Income Tax Credit.
Here are some of the reasons why your 2023 tax refund may not be what you thought it would be, as well as a way you can still decrease your taxable income.
Contract work
It’s no secret that contract work has seen immense growth over the past few years (in fact, according to a recent survey from MBO Partners, occasional independent work increased by 132% from 2020 to 2023, and independent work as a whole increased 89% during that time.) If you fall into that “occasional independent worker” category, and especially if 2023 was your first year trying out contract work, you may not have known that you either needed to:
- Make estimated quarterly tax payments to make sure you were covering the taxes that aren’t withheld for that type of work
- Update your W-4 withholding to make sure your job was withholding enough taxes to cover both your day job and your contract work
This is especially problematic if your extra income pushes you into a higher tax bracket, which could lead to a lower refund or even owed taxes.
Changes in your circumstances
Adding a side hustle to your schedule certainly isn’t the only thing that can impact your taxes. If your life circumstances changed during 2023, you could also see a reduced refund. Here are a few situations that can reduce your tax refund:
- Getting a raise at work
- Having a change in your filing status (by getting married or divorced, for example)
- Selling investments, like stocks or crypto (which could mean incurring capital gains tax)
If you’re a parent, you should also note that if your kid turned 17 in 2023, that means you’re no longer eligible to claim the Child Tax Credit, which is worth up to $2,000 per qualifying child. Instead, you may be able to qualify for the credit for other dependents, but that’s only worth up to $500 per dependent.
The silver lining
The good news is that, despite potential issues in a W-4, there is something that can work in your favor if you haven’t filed your taxes yet or you’re looking ahead to next year’s taxes: inflation adjustments to the 2023 tax brackets. In fact, the IRS raised the standard deduction for 2023 to the following:
- $13,850 (single filers — up $900)
- $20,800 (head of household — up $1,400)
- $27,700 (married, filing jointly — up $1,800)
So for those who don’t itemize, there is hope for a bigger refund.
For example, let’s say you earn $100,000 per year. If you took the standard deduction as a single filer, your taxable income would be $86,150. That would mean you’d be in the 22% tax bracket, meaning your federal taxes due would come to about $14,260 (assuming you don’t have any other deductions). Plus, you still have until April 15th, 2024, to reduce your 2023 taxable income even further by contributing to a traditional IRA. So that could be a solid option to decrease your 2023 tax burden.
Navigating tax software can be difficult. There are many opportunities to forget to claim a tax deduction or credit, or not realize that a decision you’ve made will impact your tax burden. So hiring a tax professional can help you make sure you’re getting the most out of your hard-earned money.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*
They just revealed what they believe are the 10 best stocks for investors to buy right now…
*Stock Advisor returns as of February 12, 2024
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
