Tax-Law Changes May Mean Smaller Refunds This Year: Here’s What You Need to Know

As Americans collectively dive into completing their 2022 tax returns, it seems there is only one consistent aspect of United States tax code: It’s always changing.

Sometimes, these changes are minor; other times, they are more expansive. In either case, changes both large and small can have a major impact on the size of your tax refund. According to the IRS, a number of changes to the tax law this year mean that taxpayers will likely receive a significantly smaller refund compared with the previous tax year.

But there are some positive changes, too, which are equally important to understand. So read on for a breakdown of some of the recent tax changes to learn how they are likely to impact your tax returns this year.

Higher tax brackets

Federal income tax brackets are adjusted each year to account for the effects of inflation. Though we all spent most of 2022 paying higher prices on just about everything, one silver lining is that it led to a big jump in the thresholds you must meet to fall into higher tax brackets. This means that more of your income will fall into lower tax brackets, where it is subject to lower taxes. This translates into slightly more money in your pocket instead of Uncle Sam’s.

A higher standard deduction

Just like tax brackets, the standard deduction — the amount of money taxpayers can deduct from their income without itemizing — is automatically adjusted to reflect inflation. For the 2022 tax year, the standard deduction is $12,950 for single filers, $19,400 for heads of household, and $25,900 for filers who are married filing jointly. These are $400, $600 and $800 higher than last year.

A smaller child tax credit

In 2021, the Child Tax Credit was expanded as a part of the American Rescue Plan. Before the expansion, parents would receive a $2,000 tax credit for each child (under the age of 17) claimed as a dependent. That bill raised this amount to $3,600 for each child under the age of 6, and $3,000 for each child between the ages of 6 and 18, which resulted in significant tax savings for most families.

However, though legislators considered making the expansion permanent as a part of the Inflation Reduction Act, passed in 2022, the final version of that law did not include this provision. This means that the expanded Child Tax Credit has since expired, returning to its original amount.

One note on this, families had the option to in 2021 to receive half their child tax credit in monthly payments from July to December. While parents who took this option will likely pay more in tax for the tax year in 2022, the single refund they receive after filing their taxes may be larger than last year’s.

Child and dependent care tax credit

The Child and Dependent Care Tax Credit is designed to help taxpayers pay for the costs of child care (or the care of other dependents).

Like the Child Tax Credit, the Child and Dependent Care Tax Credit was expanded under the American Rescue Plan. The expansion made the credit worth up to $4,000 for a single dependent and up to $8,000 for two or more dependents. The full credit was also made available to families earning higher incomes.

The expansion has since expired, returning to its original levels and eligibility requirements. This means that fewer taxpayers will qualify for the full tax credit; it also means that those that do will receive a less generous credit.

A reduced earned income tax credit for taxpayers without children

The Earned Income Tax Credit (EITC) is a tax credit for taxpayers earning a low to moderate income. The size of the credit is based on a taxpayer’s income level, family size, and filing status, as is eligibility. The Earned Income Tax Credit was also expanded by the American Rescue Plan: taxpayers without dependent children were able to receive a much more generous tax credit — up to $1,502 for the 2021 tax year.

The expansion has since expired. This means that for the 2022 tax year, these same taxpayers can only receive up to a maximum credit of $560.

Changes in charitable donations deductions

When the Coronavirus Aid, Relief and Economic Security (CARES) Act passed into law in 2020, it brought a number of temporary changes to the tax code. One such change made it possible for all taxpayers to deduct charitable donations of up to $300 per year when filing their federal income taxes — without needing to itemize.

This provision has expired for the 2022 tax year. This means that in order to deduct charitable donations, a taxpayer will need to itemize their deductions in lieu of claiming the standard deduction.

Higher retirement contribution limits

On a positive note, 2022 also brought higher retirement contribution limits. Taxpayers contributing to a 401(k) or 403(b) in 2022 were allowed to contribute up to $20,500 for the year vs. $19,500 in 2021. And those contributing to a SIMPLE IRA were allowed to contribute up to $14,000 vs. $13,500 in 2021. (IRA contributions limits remain unchanged for the year.)

If you’re contributing to a traditional — and not a Roth — account, these contributions will have the effect of lowering your taxable income in the current year.

Tax time is a great time to revisit your financial plan

Just like the tax code, our lives are constantly evolving. As you’re pulling together your financial life to file your taxes, this is an excellent time to revisit your financial plan (or create one if you haven’t already). Your financial advisor can make sure you’re taking the right steps to reach your goals — and that you’re doing it in the most tax-efficient way possible.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.