More than half of Americans are counting on their tax refunds this year to get by as they deal with stubbornly high inflation, even as the IRS warns taxpayers that refunds could be lower than in years past.
A new survey from Bankrate found that about 75% of adults who expect to receive a tax refund this year believe the money is important to their overall financial situation. About 43% said the refund is "very important," compared to 32% who described it as "somewhat important."
That is about 10 percentage points higher than in 2022, when 67% of Americans planned to rely on their refund.
But taxpayers could be in for a rude awakening this year: The IRS has warned Americans to brace for a smaller refund this year. There are no extra tax credits or pandemic-related stimulus payments delivered by the federal government in 2022. In 2021, the IRS delivered a third round of stimulus payments worth up to $1,400 per person. Eligible Americans could claim unpaid funds on their tax return.
Multiple states did provide handouts, Many are not taxable on federal or state returns.
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The IRS said it has issued almost 28 million refunds as of the week ending Feb. 17. That number is 26% higher than last year. The average refund amount was $3,140, down 11%.
"It’s reasonable to expect that many people will receive smaller tax refunds this year," said Ted Rossman, Bankrate senior industry analyst. "That’s mostly because many pandemic-related tax breaks have expired: stimulus payments, the expanded child tax credit and the expanded child and dependent care credit, to name a few."
Taxpayers typically receive a refund if they had too much money withheld and overpaid their taxes the previous year. For many families, the money can be substantial: Nearly three-quarters of filers received a tax refund in 2022, with an average payment worth about $3,176 – up from about $2,800 in 2021.
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The decrease in refund size can be concerning to millions of Americans who depend on the influx of money from Uncle Sam to make major purchases, save for retirement or pay off debt. It comes as many taxpayers are already grappling with a cost-of-living crisis triggered by a years-long spike in inflation that has pushed the price of everyday goods liked rent, food and gasoline higher.
Although consumer prices have stopped accelerating relentlessly, they still remain about three times higher than the pre-pandemic average.
But Rossman noted that counting on a tax refund as a key financial planning tool is not an effective use of cash.
"You’re getting your money back, which you have lent to the government at 0% interest, throughout the past year," Rossman said. "Remember that a tax refund isn’t free money. While some people prefer to receive a lump sum because they fear they would fritter away the bits and pieces throughout the year, it’s generally better to adjust your withholding, so you get more money from each paycheck and essentially break even at tax time."
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The tax-filing season ends Tuesday, April 18 this year.
Even if you receive an extension from the IRS to file your taxes, you still must pay any money owed to Uncle Sam by April 18 or face penalties and interest on any amount not paid.