Brace yourself for a smaller refund as COVID-era tax breaks expire

If you were banking on a hefty tax refund this year, think again. The expiration of COVID-era tax breaks means millions of Americans may get smaller refunds when they file their tax returns for 2022, and those who received refunds in recent years, may now owe the government money.

"Stimulus payments are a thing of the past," Bankrate.com's senior industry financial analyst Ted Rossman tells ABC News. "Last year, many people got an extra-large refund because they claimed a stimulus payment they didn't receive in 2021," he said.

According to the IRS, the average refund last year was nearly $3,200. That was up from about $2,800 in 2021. Tax experts say refund amounts this year will more likely resemble refunds from 2019 or 2020. Depending on a taxpayer's situation, tax experts say refunds could shrink by a few hundred to a few thousand dollars.

Federal stimulus checks dry up

The biggest reason tax refunds may be smaller this year is because Congress did not hand out COVID-related federal stimulus checks in 2022.

While most taxpayers received their stimulus checks automatically, some got the money as a recovery rebate credit of $1,400 per person on their 2021 income tax return. That means that for a family of four, that $5,600 credit won't be there on this year's tax return.

Paying taxes on state rebates/refunds

While federal stimulus may have gone away, over a dozen states issued taxpayer rebates and refunds last year.

Some states, including California, New Jersey and Massachusetts expect to finish handing out those checks in the first half of this year.

While these payments don't count as taxable income on a state return, they will often count as taxable income on federal returns. For example, about 3 million homeowners in New York state were automatically sent a property tax rebate of up to $1,050 in June. The IRS may count that payment as income on federal returns.

No more expanded child tax credit

In 2021, Congress gave families a boost with the expanded child tax credit, which has since expired.

The child tax credit reverted back to $2,000 last year for children under age 17. That's down from the previous year's enhanced child tax credit of $3,600 for children under age 6 and $3,000 for children under age 18.

Child and dependent care tax breaks

The American Rescue Plan Act of 2021 made the tax credit for child and dependent care expenses substantially more generous (up to $8,000 for two or more children), but that credit went back to the old limit of $2,100 for 2022.

Taxpayers who participate in their employer's pretax child and dependent care flexible spending accounts may also see lower refunds because contribution limits for those accounts were increased to a maximum $10,500 in 2021 but reverted to the previous limit of $5,000 last year.

There are still ways to maximize the existing, albeit smaller, child and dependent care credits.

"An especially good tip is that summer camps can count for the dependent care credit," said Rossman. "Parents sometimes only think school-year care is eligible, but if your kids are in day camp while you're working, that can be fair game," he said. "The Earned Income Tax Credit is extremely popular, especially among low- and medium-earners.

He added, "The American Opportunity Tax Credit and the Lifetime Learning Credit are good ones in the education space."

Charitable contribution deductions

Unlike last year, charitable donations are no longer giving most taxpayers a tax break.

Congress didn't extend the temporary tax break that allowed a special charitable deduction for taxpayers who take the standard deduction instead of itemizing.

The $300 deduction individuals could take ($600 for married couples), wasn't available for tax year 2022 and could result in a small increase in tax bills.

Quicker tax refunds

Tax day this year is April 18. Even if you file for a six-month extension, you still need to pay any tax you expect to owe by April 18, otherwise, you can get hit with penalty and interest charges from the IRS.

If you expect a tax refund, Rossman says you can improve your chances of getting it quickly by filing early and electronically. Opting to have your refund directly deposited into a checking or savings account can also speed up your return.

"Filing via paper really slows things down," said Rossman. "Especially if you're anticipating a refund, aim to get your return in soon after the filing window opens in late January. It's your money, after all. Don't give the government an interest-free loan for any longer than you have to."

How to spend your tax refund

As for what to do with that refund once you get it? While it may be tempting to use it towards a vacation or big-ticket purchase, like a television or car, Rossman says the most prudent thing to do is use at least some of the refund to pay down debt.

"The average credit card rate is a whopping 19.59% so if you have credit card debt, using some or all of your refund to pay down that debt would be a very smart choice," said Rossman.

Increasing your emergency savings is another popular way to put your tax refund to work. Almost 6 in 10 U.S. adults (58%) told Bankrate.com that they're concerned about their level of emergency savings.

"So especially with recession worries looming, boosting your savings would be wise," he said. "You could perhaps do some of both – use some of your refund to pay down debt and put some into savings."