IRS Tax Refunds Decrease: No Need to Panic
Tax season is in full swing, and early statistics from the IRS have revealed a nearly 29% decrease in the average tax refund compared to last year. While this may raise alarm bells for some taxpayers, there are several reasons why the refund picture is not as grim as it seems.
One of the main factors contributing to the decrease in average refund size is the slightly later start to the filing season. The IRS began processing tax returns on January 29th this year, compared to January 23rd last year. As a result, fewer returns have been processed at this point in time, skewing the comparison of refund sizes. The IRS has received 15.3 million returns so far, a 19% decrease compared to last year. As more returns come in, it is likely that the average refund size will increase.
Another reason to remain calm about refund sizes is the delay in issuing refunds for returns claiming the earned-income tax credit or the refundable part of the child tax credit. The Protect Americans from Tax Hikes Act of 2015 requires the IRS to withhold these refunds until at least February 15th in order to prevent fraud. This delay is playing into the relatively lower averages released by the IRS on Friday. Additionally, a pending bill in the Senate could increase the refundable portion of the child tax credit, potentially boosting refund amounts.
While individual tax situations can vary, tax-preparation experts believe that there are no federal-law changes for tax year 2023 that should significantly impact refund averages compared to the previous year. Tom O’Saben, director of tax content and government relations with the National Association of Tax Professionals, expects refund amounts in 2023 to be similar to those in 2024, barring any changes from Congress. In fact, changes to the child tax credit could potentially increase refunds on average.
There is also a silver lining for those whose income did not keep up with inflation rates in 2023. The inflation-indexed parts of the tax code increased by 7% on this year’s tax returns, which could potentially trim tax liability and increase refunds. The adjustments include core parts of a return such as the standard deduction and the income ranges for tax brackets. The chief tax-information officer at tax-prep company Jackson Hewitt predicts that average refunds this year may actually be 5% to 10% higher once all returns have been processed.
Overall, while the initial decrease in average tax refunds may cause concern, there are several factors at play that suggest the refund picture is not as bleak as it appears. With the later start to the filing season, the delay in issuing certain refunds, and the potential for increased refunds due to inflation adjustments, taxpayers can breathe a little easier. As always, it is important to consult with a tax professional to navigate any changes and ensure accurate filing.
