Why Your Tax Refund Might Be Smaller This Year

Tax refunds are likely to be disappointing this year. 

According to the Internal Revenue Service, the average refund check so far is down 11% from last year, dealing a blow to consumers already hit hard by inflation. 

About 72 million Americans had filed their 2022 tax returns by the week ended March 17, according to the IRS. The average refund payment was $2,933, down from $3,305 at the same time last year. In total, the IRS has paid out $158 billion, compared with more than $171 billion a year ago. 

At a time when the average person is struggling with high prices for everyday items like food and gas, along with expensive housing costs, this is likely to cause further pain for those counting on a big tax refund to help make ends meet. 

“Many American households use their refund payments to pay down debt or help with monthly expenses, so smaller refund checks are likely to curtail their spending in March and April,” said Nicholas Colas, co-founder of DataTrek Research. 

Eric Bronnenkant, head of tax at robo-adviser Betterment, attributes the lower tax refunds to the rollback of some pandemic-era tax credits. For instance, the child tax credit has reverted to $2,000 per child, compared with up to $3,600 in 2021. The child and dependent care credit — designed to help workers offset the costs of care for a child or dependent with disabilities — also decreased. 

On top of the expired pandemic-era tax credits, some people may end up with a smaller refund because they received severance pay or unemployment income, or tapped into their retirement accounts to help make ends meet, said Andy Phillips, director of the Tax Institute at H&R Block.

With less extra cash coming in from tax refunds, Americans could cut back on discretionary purchases, leading to lower retail sales, according to Colas. In February, overall retail purchases dropped 0.4%, following a 3.2% increase in January. 

That could add to fears that the US economy is headed for a recession, with economists surveyed by Bloomberg currently putting the probability of a downturn in the next year at 65%. 

— With assistance by Carly Wanna