Most tax filers work to reduce their bill, embrace green credits

According to the IRS, more than 165 million federal income tax returns will need to be filed in 2022. NerdWallet’s new study found that while most Americans intend to file, few understand the role of inflation in determining tax brackets. The study also revealed that the majority of Americans intend to take steps to reduce their tax obligations.

The Harris Poll conducted an online survey of over 2,000 adults in the United States between Dec. 6-8th, 2022. It found that Americans are generally positive about so-called green tax credits, which reward taxpayers who buy energy-efficient products.

Note : Americans who indicated that they intend to file or have filed a federal tax return in the specified tax year are called “filers”.

• Americans are anticipating refunds. Around half of taxpayers (55%) expect to receive refunds in the 2022 tax year. The average refund expectation is $2,205. Filers expecting a refund for the 2021 tax year expected to receive $2,221 on average. However, according to the IRS the average return was $3.167.

• Tax minimization has become a popular topic. Approximately 71% of filers (71%) have or will take steps to reduce their federal income tax bill.

• The impact of inflation is not well understood. A major shift in tax brackets for 2023 brackets is planned due to inflation. However, less than 2 out 5 Americans (37%) correctly recognized that income tax brackets were commonly adjusted to account inflation.

• Americans are optimistic about green tax credits. Around 4 in 5 Americans (81%) believe filers should be eligible for a tax credit if their homes have alternative energy systems. A third of Americans (58%) believe that a tax credit to help them buy an energy-efficient car would encourage them to do so.

A majority of Americans (86%) plan to file a federal return for the tax year 2022. Just over half of those filers (55%) anticipate receiving a federal refund. 21% expect to owe money the IRS.

On average, $2,205 is the expected refund for those who expect to receive money back. This is lower than historical averages, but it is consistent with historical expectations. The average tax-year 2021 refund was $3.176, as of October 2022. According to the IRS, 2020’s average tax refund was $2815.

Many filers (59%) expect a refund. They plan to save at least some of the refund in savings (personal, retirement or emergency savings accounts). However, there are many other options for those checks.

Americans who anticipate a refund should think about how they can help boost their financial security. Kimberly Palmer, NerdWallet’s personal finance spokesperson, says that this might be a means of paying off high-interest debt.

The average expected bill for those who expect to owe money the IRS is $2,538, This is a significant decrease from the expectation last year, when federal filers expected to owe $3,479 on average.

You should find the best tax preparation service for you and bring all necessary documents and information. 56 percent of filers say they will do the work for their 2022 federal tax returns. 84% of them plan to use tax prep software. For taxpayers earning $73,000 or less, the IRS offers a guided online filing service. This limit applies to married couples filing jointly or individually.

While many Americans prefer to file taxes themselves, people with complicated financial lives or recent major life events such as a move in a different state might benefit from personalized advice from a financial professional. Palmer states that there are low-cost options for tax prep software.

When filing taxes, filers usually take the standard deduction. This is a flat amount taken from their income to calculate their tax bill. This is in contrast to itemized deductions which can vary depending on your situation and expenditures.

The IRS reports that almost 9 out 10 tax returns for 2020 (87%) were filed using standard deduction.

The standard deduction has increased in value to $25,900 for joint filers for tax year 2022. This is an increase of $25,100 from 2021. The deduction for single filers or those filing separately is $12,950 in 2022, compared to $12,550 2021.

According to our survey, 71% of filers (71%) said they have taken or planned to take action to reduce their federal income tax bill. Most common actions were to make charitable contributions (30%), contribute to a retirement account such as a 401k or IRA (29%), to deduct qualifying medical expenses (20%), and to contribute to a pretax savings account such an FSA or HSA (17 %).

Only filers who choose to file with an itemized deduction can claim charitable contributions as a deduction. Tax years 2020 and 2021 allow charitable contributions of up to $600 per married joint filer. This could even be allowed when filing standard deductions. This law was not extended to tax year 2022.

It’s not too late to make charitable or retirement contributions for the 2022 tax year, but you can plan now for 2023. While most filers will continue to use the standard deduction for their taxes, it is important that you have a plan in place early in the year for those who itemize.

A financial planner may also be able help you with tools such loss harvesting , which 13% say they are using to reduce their tax bills.

Although inflation is a topic that has been covered daily in the news, many Americans don’t understand how it affects their taxes. A public opinion survey by YouGov in November 2022 found that 66% Americans consider inflation and prices very important issues. However, the survey revealed that only 28% of Americans think that income tax brackets don’t often adjust for inflation.

Since over three decades, the tax brackets have been adjusted upwards every year. Inflation was codified in a series of tax law amendments that took place in the 1980s. Americans were under severe pressure after a decade of high inflation rates (annual average inflation was more than 5.5% from 1973 to 1982), which led to the need for changes in the law.

The 2023 tax year will see significant changes in the brackets. The joint income below $22,000 will be considered the lowest bracket, which will increase from $20,550 in 2022 to $431,900 in 2023. While the highest bracket will rise to $462,500 from $431,900 to $4462,500, This is an increase of 7% on both ends of this scale.

American taxpayers are currently eligible for a credit on their taxes if they purchase or install energy-efficient systems in the home. These credits can be used for solar panels and plug-in vehicles made in the United States.

Eighty-one percent of Americans believe that Americans should be eligible for a tax credit if their homes have alternative energy systems. A majority (81%) also believe tax credits for “green” purchases should be available to all Americans, regardless their income.

Lastly, 74 percent of Americans believe that tax credits for energy efficient purchases will reduce America’s dependence on fossil fuels.

Concerning EVs specifically, 3 out of 5 Americans (64%) think that an EV must be manufactured or assembled in the United States in order to qualify for a tax credit. To claim the credit, EVs must be assembled in the United States by 2023. The credit can range from $7,500 to $7,500, depending on how large the battery. As EV manufacturers sell more vehicles, the credit will be phased out.

A third of Americans (58%) believe that tax credits would encourage them to purchase an electric vehicle. According to Kelley Blue Book in September 2022, an EV’s average price was $65,291. A $7,500 tax credit can be used to get a 2.5% discount on the purchase price of an EV for taxpayers in the 22% tax bracket.

If you are not yet a vehicle owner but plan to purchase an electric vehicle, ensure that your car is still available on the IRS’s tax credit list. The IRS maintains a list of EV models and manufacturers that could be eligible for a credit in the 2023 tax year. To ensure you get credit, you will need to look at the vehicle’s cost and the battery’s capabilities.