How to Mentally — and Financially — Prepare for a Disappointing Tax Refund

You may be eagerly awaiting your tax year 2022 refund to help shore up your finances — especially if you received a big one last year.

About two-thirds of individual taxpayers were entitled to refunds when they filed their tax year 2021 returns in 2022 and the average amount was nearly $3,200, according to the National Taxpayer Advocate report to Congress.

First, find out why your refund could be smaller this year. Then, keep reading to learn how to deal with it, mentally and financially.

Tax Year 2022 Refunds Could Be Smaller

Don’t be surprised if you get a smaller refund from your 2022 taxes in 2023. Last year’s refunds were unusually large due to short-term special breaks that went away in tax year 2022.

The expanded child tax and dependent care credits returned to their previous amounts, the charitable deduction for those who don’t itemize disappeared in 2022 and no one got stimulus payments.

[Read: What Is the Child Tax Credit?]

So far this year, average refunds are down more than 10% from last year’s high.

You may be counting on your refund to turn around your finances — and it might be tough psychologically to adjust to a smaller amount. But you can still make the most of the extra money to improve your money situation — even if it’s less than you were expecting.

Adjust Your Expectations

Instead of counting on a big refund again this year, expect a smaller one more in line with previous years’ amounts.

“We forget that the last couple of years with taxes was atypical,” Lindsay Bryan-Podvin, certified financial therapist in Ann Arbor, Michigan, says.

“While that big refund is nice, just acknowledging that it will be different this year and managing your expectations before you enter your numbers or talk with your accountant is helpful. Plan for the worst and hope for the best. If you get a refund, that’s great, but don’t go in expecting a refund. It will be quite a shock to the system when that refund is lower,” she adds.

Bryan-Podvin recommends preparing for taxes mentally this year like you would for any stressful situation. “Make this space as calm as possible, get the papers organized and get everything ready to manage the physicality of the stress,” she says.

She also says that focusing on what taxes can do to help can soften the blow of a smaller refund or owing money. “I tell my clients to think about the positives with paying taxes — that they go toward public education and access to libraries,” she says.

Considering taxes in a larger context can help dial down the disappointment of not getting a big refund, she says.

[Read: How to Get the Biggest Tax Refund This Year.]

Make a Plan for the Money Before It Arrives

“I’d like people to have a plan for what they’re going to do with any unexpected money,” Bryan-Podvin says.

You may want to build up your emergency fund or pay down high-interest debt — or you may be saving for a new car.

“Take stock of your finances and decide how you want to allocate those funds so you can put them toward the things that matter,” she says.

Think financially and psychologically when deciding which financial need to focus on first.

“There are all these personal finance rules of thumb — we want to have an emergency fund, pay down high-interest credit cards and save for the future,” she says.

“Sometimes it feels better to take all that money and put it toward one thing. If you have a lot of anxiety about having a small emergency fund, then take that money and use it to build up an emergency fund. Or, splitting among different goals is beneficial as well. I’m not a fan of debt, it stresses me out and if I get any sort of windfall my money goes toward that,” she adds.

[READ: Be Ready for the Unexpected With an Emergency Fund.]

Deciding which debts to pay off first can be a psychological task, too. Chipping away at a large high-interest credit card balance may make more sense on paper but paying off a smaller card balance entirely, even if it has a lower interest rate, may have more of a psychological reward, Bryan-Podvin says.

That feeling of accomplishment can help motivate you to continue focusing on paying off the rest of your debt.

Save Automatically

Even if your refund is smaller than usual, you can still save part of it before you get used to having that extra money.

You can have your refund deposited directly into more than one account — consider putting part of it in an account you don’t use for your regular expenses, whether it’s building your emergency fund or saving for the future.

“Your refund presents a perfect opportunity to boost your savings and invest in yourself,” Thomas Racca, manager of the personal finance team at Navy Federal Credit Union, says. “Oftentimes it can be difficult to think far into the future and it feels tricky to find ways to contribute to your savings but this is a foolproof way to make a difference.”

Focusing on specific goals can also help motivate you to save.

“You could use this refund to plan for future big expenses,” Racca says.

“Are you planning on growing your family? Are you planning to go on a big vacation? Are you planning to start a college fund for yourself or a loved one? Your tax refund is a great way to get ahead on saving for future plans,” he adds.

Set Aside Some of the Money for Something Fun

It won’t help your finances if you blow your whole refund on an expensive shopping spree. But using some of the extra money for something small but fun — like a special dinner — can help you feel better about your financial situation.

“Take a little bit of that money and do something nice for yourself,” Bryan-Podvin says. “That small ‘treat yourself moment’ can be helpful to build a positive association with money.”

If there’s a bigger ticket item you want to purchase but it’s not an absolute necessity, don’t buy it when you first get the money, Racca says.

“Make a note of what the item is and think about it over the next 30 days. At the end of the month if the urge to buy it is there, then purchase the item,” he says. “This waiting period can help you figure out what is an impulse buy and what you really want — while you save money along the way.”

Get More Money in Your Paycheck

It’s important to remember that receiving a big tax refund doesn’t necessarily mean you owe less in taxes. It means that you had too much money withheld from your paychecks during the year.

“I have a bias against larger refunds — it’s an interest-free loan to the government,” Michelle Morris, certified financial planner and enrolled agent with BRIO Financial Planning in Quincy, Massachusetts, says. As interest rates rise, that interest-free loan stands out even more.

Rather than waiting for a one-time refund when you file your return, you can adjust your tax withholding and get more money in each paycheck instead, which can help your finances throughout the year. Just fill in a new W-4 form to adjust your withholding and submit it to your employer.

If you do adjust your withholding, you know you have the money on hand and you don’t need to wait for a tax refund.

“Sometimes you don’t get the refund in a timely manner,” Morris says. “One all too common occurrence is identity theft. A thief files a return posing as you and pockets a fraudulent return, then you legitimately file and yours is rejected. Your refund is frozen while you grind through the horrid bureaucracy to clear it up. This can take months or even a year or more,” Morris says.

Before you adjust your withholding, make a plan for the extra money before you get used to having it in your paychecks. Morris recommends transferring it automatically to savings — for example, you could boost your 401(k) contributions at work or set up automatic transfers to another account.

If you do decide to adjust your withholding, make sure you have extra money set aside in case you do end up owing instead of getting a refund next year, Racca says.

Use Tax Time as an Opportunity to Review Your Finances

“So many of us aren’t looking at our finances on a regular basis, and tax season is a good time to take a look at what is going on in your financial situation,” Bryan-Podvin says.

“I think taxes can clue you into your financial goals and what matters to you. While tax season is stressful, I look at it as a good opportunity to fully take stock of everything in your financial picture and make changes as needed,” she adds.

This is the perfect time to compare your income with your expenses, review how you spent your money, think about your financial goals and set a path to reach them — over the short and long term.

Reviewing your finances on a regular basis can make the task less stressful and help you feel more in control of your money — plus, it will enable you to focus on what you need to do to reach your financial goals.

More from U.S. News

What to Do With Your Tax Return Money

How to Avoid IRS Tax Refund Delays in 2023

Places to Find Free Tax Advice

How to Mentally — and Financially — Prepare for a Disappointing Tax Refund originally appeared on usnews.com

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