What higher inflation could mean for your tax bill

Are you getting a smaller tax refund this year?

While we can’t predict the size of your tax refund, we can prepare you for some bad news.

People who took advantage of the increased tax credits offered during the coronavirus pandemic may be surprised to see what happens to their tax refunds now that some of those benefits are no longer available. The $300 charitable credit that some taxpayers could claim even if they filed for the standard deduction, for example, has been phased out. The child tax credit is also lower this year than last year.

“The temporary increase in the child tax credit went back at the end of 2021,” says Cremé, “so you no longer get $3,600 for children ages 6 and under or $3,000 for children ages 7 to 17.” Currently, the credit allows families to claim up to $2,000 per qualifying child, and the age limit has been lowered from 17 to 16. “Depending on how many children you had that qualified, that could be a significant difference in tax savings.”

Is there still time to lower your taxable income?

If you want to reduce your taxable income for the 2022 tax year, you have options.

“The first thing you can do to lower your taxes is to contribute to donor-advised funds,” explains Cremé. “This is a way for you to fund an account that you give to charity for years to come. The great thing is that you can front-load it and get a really big tax deduction.”

Keep in mind that charitable donations only reduce your tax burden if you itemize your deductions. If you plan to take the standard deduction, you’ll need to look for ways to lower your adjusted gross income — such as increasing your contributions to your health savings account.

“Use your HSA if you have a qualified health plan,” advises Cremé. “It allows contributions up until tax filing deadlines, so you can actually use it as a way to lower taxes after you’ve done your initial estimates — which is very handy.”

There’s another way to reduce your taxable income in 2023 — especially if you spent part of last year’s bear market watching your investment portfolio lose value. “The last thing to think about to cut taxes in 2023 is tax loss harvesting,” says Cremé.

“It’s when you sell your investments that have gone down in value to lock in a tax write-off that tax year. It has to be in a non-retirement investment account, though — so it doesn’t work in IRAs or 401(k) plans.”

What should you do after you receive your tax refund?

Think carefully before you spend your tax refund – as it may have less purchasing power than last year.

“You won’t get as much mileage out of your tax refund as you might have in the past,” explains Andrea Woroch, a financial expert with a focus on family budgeting. For example, if you were hoping to put your federal income tax back on a big purchase, you might want to wait on your spending plans until prices drop — or look for coupons and deals that can help lower costs.

“Get more money from your tax refund money by shopping savvy,” advises Woroch.

In some cases, saving your tax refund may be the smartest financial move. “If you’re saving your tax refund, you can get more out of it by putting it in a high-yield savings account to take advantage of higher interest rates,” says Woroch. By putting your tax refund into a high-yield savings account, it can earn money while you wait for rates to drop. Your tax refund can also become part of your emergency fund.

You may also want to put your tax refund toward any outstanding credit card debt, especially if last year’s price increases increased your debt load. While it may feel a little disappointing to use your tax refund to pay off debt, especially if you were hoping to use it for a family vacation or an extended shopping spree, remember that every dollar you put toward high-interest credit card debt has the potential to save you a lot of money long-term.

Once you’ve gotten rid of those high monthly credit card bills, you can use the money you would have spent on debt repayment to make any purchases you’d been putting off—and if you’re lucky, the prices will have come down since then.