Updated April 18, 2023 at 3:15 AM ET
The 2023 date to file a tax return or an extension is Tuesday, April 18 — and ahead of the deadline, the IRS says it's been paying refunds that are hundreds of dollars lower than last year.
"People should absolutely expect smaller tax refunds this year. And frankly, some people might even owe the government money," financial expert Lynnette Khalfani-Cox told NPR at the start of filing season.
Two weeks ago, the IRS said that the average tax refund it has paid out as of yet is $2,910 — a 9.8% drop from the $3,226 it measured around the same time in 2022.
It's no surprise that refunds are smaller, as federal stimulus checks have gone away, along with other pandemic-related policies. If you do have a refund coming, the IRS says payments should take fewer than 21 days, in most cases.
To answer more questions about this tax season, we asked Khalfani-Cox, the financial expert also known as the Money Coach, for guidance and advice.
File online, or face the dreaded backlog
"In 2023, you absolutely need to file your federal tax return electronically," Khalfani-Cox said.
The IRS says people who file electronically should expect to get their refund within around 21 days if they choose direct deposit and their return has no issues. "So that's fabulous," Khalfani-Cox said.
The other option is less fab: People who submit returns on paper are more likely to join the agency's large backlog.
"The IRS told us all in late 2022 that they have something like 9 million unprocessed tax returns," Khalfani-Cox said. "And it turns out that 7 million of them were paper returns."
The stimulus giveth ... and now it's gone
Because of the government response to the COVID-19 pandemic, many Americans got a $1,400 stimulus check in 2021, the third of such payments.
"But a whole bunch of taxpayers actually received what's called a recovery rebate credit," Khalfani-Cox said. "And they got $1,400 per person on their 2021 taxes," plumping their tax refund or lowering their bill.
"But now that's gone" for people dealing with 2022 taxes, Khalfani-Cox said.
How did the child tax credit change?
For this tax season, many families with two children under 6 years old can't count on an extra $3,200 worth of tax credits that helped them last year. Pandemic legislation provided $7,200 in combined tax credits for two kids under 6 in the last tax season, but that same family is now looking at $4,000 in credits.
"In 2021, parents were getting what folks call the enhanced child tax credit," Khalfani-Cox said. "It was either $3,000 for children under 18 or $3,600 for kids under 6 years old."
The child tax credit and related pandemic policies had a large impact — the U.S. Census Bureau said the measures sent child poverty rates down "46% in 2021, from 9.7% in 2020 to 5.2% in 2021," to the lowest child poverty rate on record, based on the Supplemental Poverty Measure, which was introduced just over a decade ago.
"In 2022, now that child tax credit is going back down," Khalfani-Cox said. "It's reverting back to the $2,000 level."
A special charitable deduction break also lapsed
In general, taxpayers can only deduct donations to charity from their taxes if they itemize deductions, rather than take a standard deduction. A special temporary tax break changed that for returns covering 2021 earnings.
"It was a $300 deduction for people who don't itemize and a $600 deduction for married couples," Khalfani-Cox said. "But Congress didn't extend this deduction in 2022."
Do I need to worry about Venmo, PayPal and Cash App?
Millions of Americans could be excused for freaking out a bit when the government announced it would start making Venmo and other peer-to-peer payment apps report income for goods and services worth $600 or more annually — a sharp drop from the previous threshold of $20,000.
Then the IRS postponed the plan, which had sparked confusion.
"You know, we're in a gig economy," Khalfani-Cox said. "We've got a ton of people who are freelancers and 1099 workers, contractors, consultants, people who do side hustles, etc."
It's understandable for people to feel relief about the respite, she said. But taxpayers have always been obligated to report their full income on their tax returns, whether they've received a 1099-K form or not. The IRS delayed the new reporting requirements for payment apps by only a year.
What can regular people do to help themselves?
The general deadline to file your 2022 tax returns is Tuesday, April 18. That's because Washington, D.C.'s Emancipation Day holiday falls on April 17. If you know you won't make the deadline, do yourself a favor and ask for more time.
"I can't stress this enough to people, but if you need an extension, just go ahead and file that form 4868 with the IRS," Khalfani-Cox said. "That will give you an extra six months and then you'll have until Monday, Oct. 16, to actually submit your taxes."
Reciting the litany of problems that can stack up without an extension, Khalfani-Cox notes that failure-to-file and failure-to-pay penalties can accrue each month, with interest added on to any unpaid tax amounts. Anyone filing an extension, the IRS says, "should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties."
"It kind of is always shocking to me that so many people don't do this when they know they're going to wait until the very last minute," Khalfani-Cox said. "But, you know, you really don't want to play around with Uncle Sam on this one."
If you find yourself in over your head, help is available — and some of it is free.
"If you go to IRS.gov, if you made less than $73,000 in 2022, you can use IRS Free File ... it basically does your taxes for you at no cost," Khalfani-Cox said.
And even if you're 25 instead of 65, the American Association of Retired Persons can give advice, she added, saying the AARP "has trained experts who will help people to prepare and to do their taxes or to answer tax questions."
Another option is to look for local community-based organizations.
"If you just even do a Google search in your area, about 'free nonprofit credit counselors, free nonprofit tax counseling agencies near me,' you're likely to find agencies that can provide you with some assistance and support."
What should we expect in 2023?
"So 2023, unfortunately, is already shaping up to be quite a financial 1-2-3 punch for the average American family," Khalfani-Cox said. "Not only do we still have high inflation, but we've still got a crazy stock market and a lot of volatility, rising interest rates — all of which are contributing to layoffs."
Add in the potential for smaller tax refunds, and "it kind of feels like this is just way too much," she added. "You know, I don't even know if it's a 1-2-3 whammy or like a 1-2-3-4-5."
In the current environment, it's crucial to pay close attention to our finances and how we spend and save money in 2023, Khalfani-Cox said.
She notes that the IRS has already announced a boost to its standard deductions for 2023 — raising it to $13,850 for individual filers (a $900 increase) and $27,700 for couples filing jointly (a $1,800 increase).
While many of us focus on finances each April, Khalfani-Cox urges us to plan ahead.
"You may do some forecasting using tax software or using a paid professional or even a free tax help source to be able to say, what is my tax situation likely to look like in 2023?" she said.
How's the IRS doing this year?
Overall, the IRS is in a better position now than one year ago — but customer service and lingering effects of a backlog are "the elephant in the room." That's according to National Taxpayer Advocate Erin Collins, who heads the official IRS watchdog agency.
Here's what that elephant looks like:
"The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence," Collins said in her annual report to Congress.
"We have begun to see light at the end of the tunnel. I am just not sure how much further we need to travel before we see sunlight," she added.
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