Your Tax Refund May Be Smaller This Year

If you're anticipating a tax refund, it's worth noting that it may not be as sizable as last year's. Additionally, the ongoing high inflation rates mean that the money you do receive will not stretch as far as it would have in the past. According to the most recent IRS data, the over 100 million taxpayers who have already had their returns processed by April 7th received an average refund that was 9.3% smaller than last year's, partly due to the expiration of pandemic relief programs.

Although the filing deadline for most taxpayers is on Tuesday, it has been extended for areas in California, Alabama, Georgia, New York, Tennessee, Arkansas, Mississippi, and Indiana that have been severely affected by extreme weather. The current average refund is $2,878, which is a reduction of nearly $300 from last year's $3,175. For many households, particularly working families, the tax refund is the largest one-time financial boost of the year. Kathy Pickering, H&R Block's Chief Tax Officer, noted that working families are generally the most financially constrained. She also acknowledged that the expanded earned income tax and child tax credits provided substantial support for families with children during the COVID pandemic. The pandemic credit offered up to $3,600 per child, but the child tax credit will now return to its previous amount of $2,000 per child. Additionally, the child and dependent care credit, which provides a tax benefit to parents and caregivers looking after family members while they work, was extended up to a maximum of $8,000 in 2021. However, it has now been reduced to a maximum of $2,100.

According to Pickering, the expiration of certain provisions has had a significant impact on tax refunds. Rachel Zhou, a college student from Boston, spoke about how her family has used tax refunds in the past for one-time expenses like home repairs. However, this year, despite having worked since her teenage years, she only received a refund of $1, compared to several hundred dollars in previous years. Zhou's father has shifted towards self-employment in recent years, receiving 1099 forms for delivery work. As Pickering pointed out, more Americans have taken on freelance or gig work during and after the pandemic, which can result in a lack of withholding and higher self-employment taxes.

Ted Rossman, an analyst with Bankrate.com, mentioned that tax refund recipients tend to use the money to pay off debts and increase savings. However, with the rising costs of groceries, rent, and gas, a reduced tax refund can be especially challenging for those who rely on it every year. Despite this, Rossman acknowledged that the stimulus provided during the pandemic far exceeded the difference in tax refunds.

Alaina, a 32-year-old from Florida, intends to use her refund for home repairs and debt clearance. Alaina, an online fiber artist, became self-employed in 2021 after losing her job in the healthcare sector. She revealed that she has not yet filed her taxes this year, but in the previous year, she and her unemployed husband received a combined refund of around $3,600. According to Rossman from Bankrate, lower tax refunds this year could potentially weaken consumer spending, and this might indirectly help slow inflation, something that the Fed has been trying to combat by raising interest rates to increase the cost of borrowing money. However, for households that have already spent through their savings and are now relying on credit cards to cover their monthly expenses, these higher interest rates have caused an average credit card interest rate of over 20%, making it difficult to break the cycle of debt. Rossman explained that raising interest rates and changing the price of money are blunt tools, and high inflation, if left unchecked, will be bad for everyone, but it will be the worst for people with low incomes.