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What higher inflation could mean for your tax bill

Your tax refund may be smaller this year – and it may have less purchasing power

A woman in a cafe eating brunch and working on her laptop and mobile phone.

It’s tax season again – and after a year of record inflation, you may be wondering if you’ll get a record tax refund.

Unfortunately, higher prices are unlikely to correlate with lower taxes.

“Inflation will most likely increase our tax burden in April, not decrease it,” explains Andrew Cremé, a CERTIFIED FINANCIAL PLANNER™ professional who leads the Cremé Wealth Team at SageSpring Wealth Partners. “In 2022, inflation increased significantly. But the 2022 tax code was enacted before all of this happened.”

This means that not only will you likely end up in a higher tax bracket when you file your tax returns this year, but you may also find that your tax refund (if you get one) has less purchasing power than before.

We asked the experts what you can do to lower your taxes, increase the value of your refund and prepare for the upcoming tax season.

In this article:

Will you end up in a different tax bracket this year?

Prices rose in 2022 – but so did wages. If your income increased in the last year, you may end up in a higher tax bracket.

“The taxable wage rate went up for every tax bracket and the standard deduction limits were all raised, but not as much as wages,” Cremé told us. “For example, the brackets and standard deductions increased by about 3%, while wage increases rose by 4.5%. Social Security benefits increased the most, by 5.9%. That means people are forced into higher, less favorable tax brackets.”

If you end up in a higher tax bracket this year, you may have a slightly higher tax burden. But remember that each marginal tax rate only applies to income that falls within that margin. For example, if you moved from 22% to 24% tax bracket, you will not be charged 24% on your entire income. You only pay a 24% rate on income over $89,075 ($178,150 for married couples filing jointly).

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.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less difficult if they fit your situation.

Haven Life is not authorized to provide tax, legal or investment advice. This material is not intended to provide and should not be used for tax, legal or investment advice. Individuals are encouraged to obtain advice from their own tax or legal advisor.

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Haven Term is a term life insurance policy (DTC and ICC17DTC in some states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in some states, including NC) issued by CM Life Insurance Company, Enfield, CT 06082. Police and driver form numbers and features may vary by state and may not be available in all states. Our agency license number in California is OK71922 and in Arkansas 100139527.

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