Taxpayers usually receive a federal refund when they’ve overpaid yearly taxes or withheld more than the amount owed. In a recent announcement, the IRS warned taxpayers that they could see a smaller refund in 2023 than they did this year. Here’s why.

Lack of Stimulus Checks

For the past two years, many taxpayers collected additional refunds due to economic impact payments (a.k.a. stimulus checks), which were distributed during the COVID-19 pandemic. The IRS issued the third and final round of stimulus payments worth $1,400 per person in 2021, and eligible Americans could claim unpaid funds on their tax returns this year. So, because there were no economic impact payments for 2022, taxpayers will not receive an additional stimulus payment with a 2023 tax refund.

No Standard Deduction for Charitable Contributions

Another substantial change affecting 2022 tax returns will be the way charitable contributions are deducted. In 2021, the IRS temporarily permitted individuals to deduct $300 per person, up to $600 per family, without needing to itemize deductions. That is not the case this year. Almost 90% of taxpayers use the standard deduction, which means most Americans won’t be able to deduct charitable contributions.

1099-K Forms for Side Hustles and Part-Time Gigs

When the American Rescue Plan was signed into law, a new rule was enacted that will affect those who utilize third-party payment services like PayPal or Venmo. Taxpayers who have part-time jobs or side hustles – or even just casually sell their used goods on eBay, Etsy, or Facebook Marketplace – should expect to receive a 1099-K form from whichever platform they used if their sales reached $600 or more starting in 2023. Previously, one would need to earn at least $20,000 or execute at least 200 transactions in order to qualify for a 1099-K tax form. This will be the first time that many Americans are filing taxes on their side hustles or part-time gigs, which could also contribute to a lower tax refund for some taxpayers. Note that money received from friends or family via a third-party app as a gift or reimbursement for personal expenses is not taxable.

NOTE: On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions.*

* IRS.GOV (Article Link)