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Life changes like getting married or divorced, having or adopting children, and buying or selling a house have traditionally had an impact on your federal tax return. However, the 2023 tax season will likely throw surprises at taxpayers who don’t plan ahead. It's important to be prepared so you're not shocked by the result when you file your income taxes.
There are several reasons why your tax refund could be less than what you expect – or you may even have a balance due.
Why your tax refund might be less than you expected
For most Americans, tax returns are the biggest single financial transaction of the year. And not getting a tax refund, or a smaller tax refund than you anticipated this year can cause some concern. It could mean making the decision to not purchase items you and your family need, not being able to pay down debt and bills, or add to your savings account for future needs.
Let’s take a look at why this might happen to you this year and what you may be do about it – or at least plan ahead.
If you can check off any of the below items, you WILL have a different tax return experience than last year, but we have tips to help prepare you before you file your 2022 income tax return.
Do any of these experiences apply to your personal situation in 2022?
- Collected unemployment benefits
- Became self-employed (full or part time)
- Had any kind of change in your job (furloughed, laid off, worked from home, worked multiple jobs, or retired)
What could cause my tax refund to be lower?
A lower-than-expected tax refund could be caused by one or more of the following items:
1. Unemployment Benefits
According to the United States Department of Labor, nearly 60 million people have filed for unemployment since March 2020. Unemployment benefits are subject to federal and state taxes – like any other source of income. State unemployment benefits you received, are considered taxable income on your tax return.
What you might not be aware of: Income tax withholdings work differently with unemployment benefits because there is no automatic tax withholding. This means taxpayers must opt in or elect to have taxes withheld from their unemployment benefits. Understandably, most folks who are unemployed don’t elect to have taxes withheld from their benefit payments.
Also, there’s a catch: even if you elected to have taxes withheld on these benefits, tax withholdings for unemployment benefits are only available at a 10% rate. A 10% withholding rate is often not enough. If you did not request withholdings, you’ll want to consider setting aside a portion of your unemployment benefits or other earnings in the coming days for possible taxes due come Tax Day.
The influx in gig economy has been steadily increasing since the COVID-19 Pandemic. Many people became self-employed for the first time to make ends meet and aren’t aware that there are tax implications and other tax laws that are now applicable to them. Did you or someone you know start doing ride sharing, become delivery drivers, consult or coach, make and sell craft items, become dog walkers, tutor, babysit, clean homes, landscape, or any other side hustles in 2022? Becoming self-employed and working in the gig economy will have a significant effect on your tax return.
You may think you want to consider keeping self-employment or side hustle work as “money under the table,” but you can not. Not only are you legally required to report this income, but many folks do not realize that there may be significant tax deductions and tax benefits available on your hard work. Sometimes your investment, and out of pocket costs and expenses, can even be more than what you actually earned. Like gas and travel expenses, office supplies, phone and internet bills, vehicle use, and other startup costs. These are deductible expenses that will lower your tax liability on your side gig work and maybe even on other income that you have.
If you’re newly self-employed, you may now have to make quarterly estimated payments. Quarterly estimated taxes are due on April 15, June 15, September 15, and January 15. If the 15th falls on a weekend, or a holiday, then the due date is the next weekday.
Use this Self-Employment Tax Calculator to estimate your tax bill or refund. Failure to pay taxes correctly over the time you earn side gig income could risk penalties and interest charges come tax time. Know the rules. Have less risk.
3. Unexpected Job Changes
Whether you were laid-off, started a side-gig, worked part-time, started a new business, or even began working from home for all or part of the year if you changes to your income or how you earned your income you will most likely see changes. All of these changes may affect tax returns in many different ways.
A home office is not deductible if you worked from home and you receive a W-2. However, taxpayers who are self-employed may qualify for a home office deduction. Keep your office area separate from your family and keep good records of when you use the office.
If you retired this year, you’ll also have a different tax filing experience this year – perhaps the biggest life change you have had in years or decades. Generally, your retirement income is reported on a form 1099-R. Once you choose to start drawing from Social Security, you should receive a form SSA-1099.
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Other reasons your tax refund may be less than expected
While unemployment benefits, self-employment, and unexpected job changes are the major items that may affect your tax refund, there are others that can affect your refund:
4. Tax credits on your tax return
If you regularly qualified for tax credits – like Earned Income Tax Credit (“EITC”) or others, they can be impacted by things like unemployment benefits and self-employment earnings. Often, the impact can be significant.
5. Early retirement withdrawal
If you are under age 59 ½ and you took money from an IRA or retirement account, you may be subject to a tax penalty. This is often referred to as an early withdrawal penalty and is 10% of the money you withdrew.
6. Overdue federal tax debts
If you’re overdue on past federal tax payments, your current tax refund is generally applied to that balance and you will receive any remaining refund.
7. Past-due child support
Similar to any overdue tax debt, your tax refund can also be used to cover any past-due child support.
8. Federal agency non-tax debts
These debts include past due or defaulted student loan payments, payments on Department of Housing and Urban Development (HUD) loans, and any fines, penalties or fees due to any federal department, all of which will be paid for with your tax refund. Currently student loans are suspended from having interest assessed and collections. This ruling is currently schedule to expire July 1, 2023.
9. State income tax debt
If you have an outstanding state tax debt, your refund can be applied to pay it off in the same manner as the federal debt.
10. Student direct loan and guaranteed loan repayments
The CARES Act has given temporary payment relief to borrowers with qualifying federal student loans. Even if you continued to make payments on your federal student loan, the interest rate is 0%. While payments helped you pay down your debt, it did not pay interest and will not count toward the tax deduction that allows you to deduct up to $2,500 in student loan interest.
Notice from the Bureau of Fiscal Service (BFS) regarding withholding refund to pay prior debt
Once your tax return has been processed and the IRS releases your refund, you should receive a notice from the BFS explaining the reason why any amounts were withheld from your refund. The notice should include the following:
- Original refund amount
- Your offset amount (the amount of your refund money they take)
- The agency receiving the payment
- Address and phone number of the agency
If you didn’t receive a notice from the BFS but your refund gets delayed, you can call 800-304-3107 or 866-297-0517 (TDD for the hearing-impaired) to inquire why.
What was the average 2021 tax refund?
According to the IRS, more than 96 million Americans received a tax refund and the 2021 average federal tax refund was $3,039. This year will look very different for millions of people as they may see a decrease in their tax refund this year. The reduction is based on a reduction in certain credits and catching up to the changes in withholding which occurred just before the Pandemic hit.
How do you prepare to avoid refund shock?
Start early, find a Tax Pro, make a plan, and stick to that plan is my top advice going into the 2023 tax filing season. Do NOT wait until April 18 or even when that first wage-related document is delivered to your mailbox. It’s crucial you start as early as possible, so you don’t panic and chance missing the deadline.
In closing, if you experienced employment changes this year it’s vital that you plan early and make adjustments before refund shock hits you and takes full effect: saving now, adjust your withholdings, and plan to file early to have more time to pay. Remember, Jackson Hewitt Tax Pros are here for the hardest working and we want to prepare everyone with the tools to maneuver this challenging year and avoid a refund shock.