IRS refunds are plunging as this year’s tax season ramps up — here’s why
Inflation-battered Americans who filed their taxes early in hopes of a much-needed cash infusion have received smaller tax refunds — nearly a third less than they were last year, according to data from the Internal Revenue Service.
The average refund issued through Feb. 2 totaled $1,395, a massive $568 decline, or 29%, from this time last year, the IRS’ filing season statistics showed.
The figures are based on nearly 2.6 million tax refunds collectively worth about $3.65 billion.
However, the IRS has cautioned that the average refund amount will likely change in the coming months as more returns come in.
Those who expect to receive the earned income tax credit, a tax break for low- to moderate-income workers, or the child tax credit, cannot legally receive their refund before mid-February, which could also be distorting the picture.
The agency also pointed out that the filing season kicked off on Jan. 29, compared with Jan. 23 the prior year, further complicating any comparisons.
Considering this, “filing season statistics show a strong start to filing season 2024, with all systems running well,” the IRS said.
Taxpayers typically receive a refund if they had too much money withheld and overpaid their taxes the previous year. Nearly three-quarters of filers received a tax refund in 2023, with an average payment worth about $3,176, down about 3% from the previous year.
Chicago-based certified public accountant Daniel Rahill told USA Today that early filers may be receiving smaller refunds because they did not increase their tax withholding amounts despite getting a raise in 2023.
“‘Gig’ workers may have earned more income but not stepped up their estimated tax payments, again yielding smaller refunds,” Rahill added.
Another possibility, according to Rahill, is that “some filers may have reaped more investment income from a strong stock market, triggering more taxes,” according to USA Today.
The markets had a stellar 2023. The S&P 500 ended the year with a gain of more than 24%, while the Dow Jones Industrial Average rose more than 13%, near a record high.
The tech-heavy Nasdaq also benefitted greatly from a year of advancements related to artificial intelligence, closing out 2023 with a whopping 43% gain.
The IRS expects the data to change as more filers submit their returns by the April 15 deadline.
“[I]t will be an interesting analysis to see where the next wave of numbers come in once we receive more tax filing data,” Rahill told USA Today.
In total, the IRS anticipates receiving more than 128.7 million individual tax returns. On average, three of four tax filers are due to receive a refund.
For taxpayers who file electronically and choose to receive their refund via direct deposit, they can expect those funds to hit their account within 21 days, according to the IRS. Americans who mailed their return, however, can expect to wait a minimum of four weeks.
Experts have warned that a big tax refund isn’t all that it’s cracked up to be.
“We have to change our mentality about how tax refunds are because we have to remind ourselves that it is our money to begin with,” Rebecca Chen, reporter and CPA, told Yahoo! Finance.
“And this is quite a big deal because we’re living in a very high-interest, high-debt environment,” she added, noting that overpaying in taxes is “essentially like giving them [the IRS] an interest-free loan throughout the year.”
