As of February 2024, the Internal Revenue Service (IRS) has issued approximately 3.2 million tax refunds, marking the beginning of this year’s tax season. However, there is a significant shift that taxpayers should be aware of—the average tax refund is now $1,395, which is 29% lower compared to last year's average of $1,963 during the same period.
This drop in tax refunds has raised concerns among taxpayers who rely on their refunds for savings, debt payments, or major expenses. But why are refunds smaller this year? Let’s take a closer look at the reasons behind this decline, what taxpayers can do, and how it might affect personal finances.
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Why Are Tax Refunds Smaller in 2024?
Several key factors have contributed to the reduction in average tax refunds this year. Understanding these changes can help taxpayers plan their finances better.
1. Expiration of Pandemic-Era Tax Credits
During the COVID-19 pandemic, the U.S. government provided various relief measures, including expanded tax credits such as:
- The Child Tax Credit (CTC): During the pandemic, the CTC was temporarily increased to $3,600 per child under six and $3,000 for older children. However, this has reverted to the pre-pandemic level of $2,000 per child.
- Earned Income Tax Credit (EITC): The enhanced EITC benefits for childless workers expired, reducing potential refunds for many low-income individuals.
- Stimulus Payments and Other Reliefs: Previous tax years included stimulus payments and other COVID-related tax reliefs, which boosted refunds. These benefits are no longer available.
With these benefits expiring, many taxpayers are seeing noticeably smaller refunds.
2. Changes in Tax Withholding and Income Adjustments
Another major reason for smaller refunds is how much tax was withheld from paychecks throughout the year.
- Many employees did not adjust their W-4 forms, which determine tax withholding amounts. If too little tax was withheld in 2023, it could lead to either a smaller refund or even owing money to the IRS.
- Workers in the gig economy or those with multiple jobs may not have had enough taxes withheld, reducing their refunds.
3. Higher Interest Rates and Economic Factors
The U.S. Federal Reserve has increased interest rates over the past year to combat inflation. While this helps control rising prices, it also affects tax refunds in several ways:
- Higher borrowing costs mean individuals may have less money to save, invest, or withhold for taxes.
- Investment income, such as interest from savings accounts, is taxable, and some taxpayers may owe more due to higher earnings from interest.
- Mortgage and property tax deductions may not be as beneficial due to higher interest rates, changing tax refunds for homeowners.
4. Inflation and Cost of Living Adjustments
Although wages have increased slightly in some sectors, inflation has reduced the purchasing power of earnings. Many taxpayers earned more in 2023, which could have pushed them into a higher tax bracket, leading to smaller refunds or a tax balance due.
What Can Taxpayers Do to Get a Bigger Refund Next Year?
If you’re one of the millions of Americans receiving a smaller refund—or even facing a tax bill—there are several steps you can take to better manage your taxes for next year.
1. Adjust Your Tax Withholding
- Check your W-4 form with your employer. If you want a bigger refund next year, consider increasing tax withholding so that more tax is taken from your paycheck throughout the year.
- Use the IRS Tax Withholding Estimator on the IRS website to determine the correct amount.
2. Take Advantage of Available Tax Credits and Deductions
- Earned Income Tax Credit (EITC): If your income is low-to-moderate, you may qualify for this credit, reducing the amount of tax you owe.
- Education Credits: Students or parents of students can claim the American Opportunity Credit or Lifetime Learning Credit for tuition costs.
- Retirement Contributions: Contributing to a 401(k) or IRA can lower taxable income, which might help increase refunds.
- Itemized Deductions: If you own a home, have medical expenses, or make charitable donations, consider itemizing deductions instead of taking the standard deduction to lower your taxable income.
3. File Your Taxes Early and Electronically
- The IRS recommends that taxpayers file electronically and choose direct deposit to receive refunds faster.
- Early filers can avoid delays and get their refunds sooner.
4. Consider Professional Tax Assistance
- If your taxes are complex, hiring a tax professional or CPA may help identify additional deductions and credits you might have missed.
- Some taxpayers also benefit from free tax assistance programs, such as the IRS’s Volunteer Income Tax Assistance (VITA) for low-income individuals.
How Will This Affect Personal Finances?
A smaller tax refund means that millions of Americans may need to adjust their financial planning for 2024.
- Less money for major purchases: Many taxpayers use refunds for home repairs, car purchases, or paying down credit card debt.
- Limited emergency savings: Refunds often serve as an opportunity for Americans to build savings, but with lower refunds, people may need to find other ways to save.
- Potential tax liabilities: Some people who expect a refund may actually owe money to the IRS, creating financial stress.
Financial experts recommend that individuals plan ahead and treat their tax refund as part of an overall financial strategy, rather than depending on it for major expenses.
The 2024 tax season has started with a noticeable drop in average refunds, down 29% from last year. The main reasons include the expiration of pandemic-era tax credits, changes in income levels, and adjustments in tax withholding.
While smaller refunds may be disappointing for many, taxpayers can take proactive steps to adjust their withholding, maximize deductions, and better plan for next year.
If you’re filing your taxes soon, make sure to file early, review your withholdings, and explore all available credits and deductions. Proper planning can help ensure you get the most out of your tax return next year.
