Taxes 2023: How To Prepare For a Disappointing Refund
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This year, most Americans do not anticipate receiving a windfall of tax refund money from Uncle Sam.
Findings in GOBankingRates’ taxes 2023 survey polling 1,002 Americans show 37% of overall respondents expect their tax refund to be less than last year’s refund. Thirty-five percent of respondents said they expect a refund which is about the same.
While expectations may not be high for massive tax refunds, a smaller refund is not always a bad thing. Here’s what taxpayers need to know about preparing for a less-than-anticipated refund.
Review Your Withholding Amount
The truth about tax refunds, especially large amounts, is taxpayers only receive these refunds when they’ve overpaid their taxes or withheld more than they needed. A refund from the government is a loan you made to the government with no interest, said Danielle Darling, LPL-affiliated financial advisor at Resource One Advisors. It was your money to begin with.
If you are preparing to receive a smaller refund, Darling recommends reviewing how much you withheld. Doing so will allow you to make appropriate adjustments and minimize the amount you lend to the government. This allows taxpayers to keep more money in their pockets throughout the year.
Take Our Poll: What Do You Plan To Use Your Tax Refund For?
Seek Guidance From Your Financial Planner
Anyone who feels their tax refund is short-changed for tax year 2022 should speak to their financial planner, said Michael Gennawey, CRPC and LPL-affiliated financial advisor at SoCal Wealth Management.
“Your financial planner has a few basic strategies that can help reduce surprises in the future,” Gennawey said. “Make sure you know how your financial advisor approaches these topics and you will feel much more confident in your tax bill management.”
Plan Ahead for 2023
It’s understandable for households to be disappointed by a smaller refund, especially those relying on refunds to pay for essential expenses. Those who are self-employed or have a main income that is a W-2 may still be able to fund a tax-deductible IRA or SEP-IRA for 2022 to help lower their tax burden, said Carlo Panaccione, LPL-affiliated CFP and founder at Navigation Group.
However, with the sun setting of many tax code provisions lowering refunds, Panaccione said it’s key for households to plan ahead for 2023. This means saving a bit more money and staying focused on what’s ahead.
Where Should I Put My Refund?
A small refund can make a big difference in your overall financial picture. Tom Van Horn, chief product officer at Magnifi, said taxpayers might put their refunds toward the following investing goals.
Retirement
Not feeling like you’re financially on track to retire? Putting your tax refund into your investment portfolio can be helpful in getting caught up.
Van Horn said in 2023, the 401(k) contribution limit is increasing to $22,500 and $6,500 for IRAs. If you haven’t maxed out your 2022 IRA yet, you have until April 18, 2023, to do it.
College Savings
“If you are contributing to a 529 plan, you can generally contribute up to the federal limit for gifts — $17,000 for an individual and $34,000 for married couples — for each beneficiary in a given year before you trigger a taxable event,” Van Horn said.
Emergency Fund
If you’ve recently dipped into your emergency fund or do not have one at all, put your tax refund into this space to cover unexpected expenses. Remember the general guideline is to have three to six months’ worth of living expenses in said fund.
“Having a fund set aside can give you peace of mind and support you when the time arises as well as prevent you from taking on any debt,” Van Horn said.
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