The Reasons Behind the 6 Percent Increase in IRS Tax Refunds This Year

The Reasons Behind the 6 Percent Increase in IRS Tax Refunds This Year

Tax season is in full swing, and there’s good news for taxpayers this year. The average tax refund amount is 6 percent higher than last year’s, according to the latest data from the Internal Revenue Service (IRS). Experts have identified several factors contributing to this increase, including a higher standard deduction and adjustments for inflation.

In its recent update on the tax-filing season, the IRS revealed that the average refund amount this year is $3,109, a significant increase from last year’s $2,933. This comes as a reversal of the trend observed earlier in the season when the agency reported that the average refund was nearly 30 percent lower than the previous year. However, the IRS attributed this decrease to the tax-filing season starting a week later and delays in releasing refunds for returns claiming the earned-income tax credit (EITC) or the refundable portion of the child tax credit due to anti-fraud laws.

So, who is likely to see bigger refunds this year? Experts point to the IRS’s adjustment of tax provisions for inflation as a major factor. In 2022, prices rose by 7.99 percent, the highest rate of annual inflation since 1981. In response to this inflationary pressure, the IRS increased the standard deduction and tax brackets by approximately 7 percent for the 2023 tax year. For example, the standard deduction for married couples filing jointly increased by $1,800, or 7 percent, from the previous year.

This adjustment means that taxpayers whose income did not keep pace with inflation are more likely to receive larger refunds. Mark Steber, chief tax information officer for Jackson Hewitt, explains that if your income remained the same as the previous year without accounting for inflation, you could see a better refund. Steber predicts that some taxpayers could see refunds increase by up to 10 percent.

Data from the Bureau of Labor Statistics indicates that Americans’ real wages, adjusted for inflation, grew by 1.3 percent in 2023 after two years of negative growth. This means that even if some individuals received raises below the pace of inflation or no raises at all, the overall increase in real wages helps explain why this year’s tax refunds are already 6 percent higher and likely to surpass last year’s.

Families with lower incomes may also expect a boost in their refunds this year. While they may not benefit from the higher standard deduction, they could see a significant increase in their refund amount due to a larger maximum amount they can claim for the EITC, which is fully refundable. The EITC amount increased by nearly $500 for the 2023 tax year, benefiting Americans with annual incomes below $63,698 and paying up to $7,430 for three or more qualifying children. The disbursement of EITC credits in mid-February, following anti-fraud legislation, contributed to the recent boost in refund sizes compared to earlier in the season.

As the tax-filing deadline approaches on April 15, it’s essential for taxpayers to be aware of deadlines and extensions. Filing a tax return on time or requesting an extension by the deadline helps avoid late-filing penalties. The late-filing penalty is typically 5 percent per month of unpaid tax, while the late-payment penalty is usually 0.5 percent per month, with both penalties maxing out at 25 percent of overdue taxes.

Taxpayers can request an automatic six-month extension, giving them until October 16, 2024, to file their tax return. However, it’s important to note that taxes owed must still be paid by the regular April 15 deadline, even with an extension to file returns. Some taxpayers, such as those living and working outside the United States or those affected by natural disasters, may have additional time to file their taxes without requesting an extension.

In conclusion, the 6 percent increase in IRS tax refunds this year can be attributed to various factors. The adjustment of tax provisions for inflation, increased standard deduction, and larger maximum amounts for the EITC are all contributing to bigger refunds for many taxpayers. While some individuals may see lower refunds, overall, experts predict that the average federal tax refund will be higher for the 2024 filing season compared to last year. As the tax-filing deadline approaches, it’s crucial for taxpayers to meet deadlines or request extensions to avoid penalties.