Confirming previous projections, scores of Americans are getting smaller tax refunds this year than a year ago, at a time when finances for many are already brittle.
The average refund was $3,305 as of the week ending March 17 this year, down from $2,933 from roughly the same time last year, Internal Revenue Service figures show. The number of refunds was 53.9 million versus 51.7 million. The combined amount refunded was down to $158 billion from just over $171 billion.
The dollar refund deduction comes as inflation keeps making it harder for people to cover basic expenses and as many Americans are saving less. Pocketing a refund has typically been a timely benefit for several reasons. For example, people have relied on the returned money to erase high-interest rate credit card debt, rebuild an emergency fund, diminish other bills, and even stash away as savings.
At the same time, the number of Americans convinced that they could generate $2,000 to spend has hit its lowest level in four years, based on a KeyBank survey.
The IRS warned last year that tax refunds issued in 2023 would arrive in smaller amounts. Further, the cut came as multiple tax breaks tied to the COVID-19 pandemic expired in 2021. And even those that got some relief from tax breaks received a decline in lower amounts.
Based on the IRS, some tax credits have reset to the levels from 2019. For instance, the amount per dependent for those eligible for the Child Tax Credit was $2,000 for the 2022 tax year, versus $3,600 in 2021. Qualified taxpayers with no children who got $1,500 in 2021 for the Earned Income Tax Credit got $500 in 2022. The Child and Dependent Care Credit reverted to a maximum of $2,100 in 2022 from $8,000 in 2021.
So, if you get a smaller refund, some experts suggest making moves to help get the most out of it. Take credit card debt. Consider paying it off as fast as possible, as rising interest rates now could boost the cost.
Another option perhaps is a certificate of deposit (CD) with interest rates surging. The Ascent just reported banks are now offering higher rates on CDs – over 4% in some cases – to help attract customers. The Ascent reviews financial products like credit cards, savings accounts, mortgages, and other items to help people make informed decisions on money matters. The site claims its selection of “the best online savings accounts” can earn 13x times the national average savings account rate.
However, like other investments, be mindful that CDs can have ups and downs. Do some research before taking the plunge by checking this out and here as well.
Further, particularly if you have a financial adviser, it might be prudent to get some advice what to do with your refund after that professional assesses your existing financial situation. For leads, check out the National Association of Personal Financial Advisors.