The IRS has forecast that over 165 million individual federal income tax returns will be filed for the 2022 tax year. A new NerdWallet study has found that, while most Americans plan to file, many don’t yet understand how inflation plays a role in setting tax brackets. It also found that most Americans plan to take some action to minimize their tax obligations.
The survey, conducted online by The Harris Poll over the period Dec. 6-8, 2022, among over 2,000 U.S. adults ages 18 and older, also found that Americans have a generally favorable view of so-called “green tax credits,” which reward taxpayers for buying energy-efficient products.
Note: Throughout the report, “filers” refers to Americans in our survey who said they plan on filing or did file a federal tax return for the tax year specified.
Americans anticipating refunds. About half (55%) of filers are expecting refunds for the 2022 tax year, with a refund expectation of $2,205, on average. For the 2021 tax year, filers who expected a refund expected $2,221 back, on average, but according to the IRS, the average return was $3,167.
Tax minimization is popular. About 7 out of 10 filers (71%) have taken or will take actions to lower their overall federal income tax bill, with charitable contributions (31%) topping the list of minimization activities.
Inflation’s impact not broadly understood. Despite a major shift planned for tax year 2023 brackets due to the impacts of inflation, less than 2 in 5 Americans (37%) correctly identified that income tax brackets are commonly adjusted to account for inflation.
Americans optimistic about green tax credits. About 4 out of 5 Americans (81%) think filers should receive a tax credit if they install alternative energy systems at their home. Additionally, about 3 in 5 Americans (58%) say a tax credit for buying an energy-efficient vehicle would motivate them to purchase one.
Outlooks on tax refunds and bills
About 9 out of 10 (86%) Americans plan to file a federal tax return for the 2022 tax year. Of those filers, just over half (55%) expect to receive a federal refund. On the other side of the fence, 21% of filers expect to owe money to the IRS.
Of those who expect to get money back, the expected refund is $2,205, on average. This is in line with historical expectations, but lower than actual historical averages. For example, through October 2022, the average tax year 2021 refund was $3,176. According to the IRS, the tax year 2020 average refund was $2,815.
Many filers (59%) expecting a refund plan to put at least some of that refund into savings (personal, emergency or retirement savings accounts), but there are lots of other plans for those checks.
“For those Americans anticipating a refund, it’s worth considering how it can be used to boost your overall financial security. For some consumers, that might mean paying off high-interest debt, especially in our current environment of rising interest rates, while for others, it might mean starting an emergency savings fund,” says Kimberly Palmer, personal finance spokesperson for NerdWallet.
For those expecting to owe money to the IRS, the anticipated bill is $2,538, on average. This is a substantial decline from last year’s expectation, when federal filers who expected to owe money were predicting a $3,479 bill, on average.
Find the right tax preparation for your situation and show up with all the documents and account details you’ll need. Many filers (56%) say they’ll be doing the work themselves for their 2022 federal returns, with most (84%) saying they will be using tax prep software. The IRS provides access to a free, guided online filing system for taxpayers with adjusted gross income (your income minus some major expenses like student loan interest payments) of $73,000 or less. That limit applies whether filing by yourself or jointly as a married couple.
“While many Americans prefer to file their taxes themselves, those with a complicated financial life or recent major life changes such as a move to a different state may benefit from customized advice from a financial professional. Otherwise, there are many low-cost options when it comes to tax prep software,” Palmer says.
Tax minimization approaches
Filers generally take the standard deduction when filing their taxes, lopping a fixed amount off their income when computing their tax bill. This stands in contrast to itemized deductions, which vary based on your circumstances and expenditures.
According to the IRS, for the 2020 tax year, almost 9 in 10 returns (87%) were submitted using the standard deduction.
For tax year 2022, the value of the standard deduction increased to $25,900 for joint filers, up from $25,100 in 2021. For single filers and those filing separately, the deduction is $12,950 for 2022, up from $12,550 in 2021.
Our survey found that about 7 in 10 filers (71%) have taken or plan to take action to lower their federal income tax bill. The most common actions cited were making charitable contributions (30%), contributing to a retirement account like a 401(k) or IRA (29%), deducting qualifying medical expenses (20%) and contributing to a pretax savings account like an FSA or HSA (17%).
Charitable contributions can be taken as a deduction only if filers choose to file with an itemized deduction. For tax years 2020 and 2021, charitable contributions totaling up to $600 for married, joint filers could be deducted even when filing with standard deductions. That law was not extended for tax year 2022.
While it’s too late to make any charitable or retirement contributions for the 2022 tax season, you can start planning now for 2023. Most filers will probably continue to use the standard deduction, but for those who itemize, having a plan early in the year is paramount.
You could also work with a financial planner who may be able to help you with tools like tax loss harvesting, which 13% of filers might be taking advantage of, as they say they will be deducting losses on stock sales to minimize their tax bills.
Tax brackets and inflation adjustments
While inflation has been prominent in the daily news cycle, not all Americans understand its impact on their taxes. Although a November 2022 survey from public opinion company YouGov found that 66% of Americans say inflation and prices are very important issues to them, our survey found that about a quarter (28%) of Americans believe income tax brackets aren’t commonly adjusted for inflation.
In fact, tax brackets have been adjusted upward every year for over three decades. A series of tax law changes in the 1980s codified bracket changes based on inflation. A decade of high inflation rates (annual inflation was over 5.5% every year from 1973 to 1982) put a strain on Americans, forcing the change in the law.
For the 2023 tax year, brackets will see a sizable shift. The lowest bracket will apply to joint incomes under $22,000, up from $20,550 in 2022, while the highest bracket will rise from $431,900 to $462,500. That’s an increase of 7% at both ends of the scale.
Americans’ outlook on green tax credits
American taxpayers can currently claim a credit on their tax bill when they install certain energy-efficient systems in their homes or purchase electric vehicles (EVs). These credits apply for things like solar panels or plug-in vehicles assembled in the United States.
Most Americans (81%) believe Americans should receive a tax credit if they install alternative energy systems at their home. They also largely (81%) say tax credits for “green purchases” should be open to all Americans, regardless of income.
Finally, about 3 in 4 Americans (74%) say that tax credits for energy-efficient purchases will help America reduce its consumption of fossil fuels.
Looking specifically at EVs, about 3 in 5 Americans (64%) believe that, in order to get a tax credit for a purchase, the EV should be required to be made or assembled in the United States. As of 2023, EVs need to be assembled in the United States to claim the credit, which can be up to $7,500 depending on the capacity of the EV’s battery. The credit is phased out as the EV manufacturer sells more vehicles.
About 3 in 5 Americans (58%) also say that tax credits for buying an EV would motivate them to buy that type of vehicle. According to Kelley Blue Book, the average cost of an EV in September 2022 was $65,291. For a taxpayer in the 22% bracket, a $7,500 tax credit could account for a 2.5% rebate on the EV’s purchase price when tax season rolls around.
If you haven’t purchased your vehicle yet but you’re planning to take advantage of the tax credit for purchasing an EV, make sure your car is still on the list. The IRS keeps a list of EV manufacturers and models that may be eligible for a credit for the 2023 tax year. You’ll still need to dive further into the cost of the vehicle, the battery’s capacity and other details to make sure you can get a credit before you buy.