Americans are projected to receive less in tax refunds this season, with the Internal Revenue Service (IRS) handing back $20 billion less this year than last year.
The total amount refunded to taxpayers by the IRS to date this year is approximately $198.9 billion—$23.5 billion less than in 2022, the latest data from the agency shows. That equates to an average refund of $2,878—or $297 less per person than last tax season.
The new data includes filings up to April 7, less than 11 days out from Tax Day. The figures may change as more Americans file before the April 18 deadline.
“That is the lowest level in 10 years, according to strategists,” CNBC’s Robert Frank told Squawk Box on Monday. “Analysts [are] saying that $20 billion drop could add further downward pressure on the economy.”
The drop in total tax refunds reflects a 10.6 percent decrease from 2022, which analysts have largely chalked up to the ending of pandemic-related tax credits, like stimulus checks.
“Lots of stimulus benefits and tax credits went away,” Joann Weiner, an economist at the George Washington University, told Newsweek. “Many of those tax credits were refundable, meaning that people could get a refund on their taxes. Eliminating the credits would, thus, eliminate or reduce the amount of the refund.”
Between 2021 and 2022, child tax credits fell by $1,600, earned income tax credits fell by just over $1,000 and child and dependent care credits fell by $5,900, Frank said.
“For many working families, tax refunds are the biggest one-time windfall of the year. Surveys show most families use that money to pay down debt, make home improvements and pay everyday expenses,” he said.
A Bankrate survey conducted last month found that 75 percent of respondents said that this year’s tax refund would be very or somewhat important to their financial health, an 8 percent increase over the number who said the same last year.
Frank said it would be interesting to see whether the decrease in tax refunds will show up in first quarter earnings for major retailers, like Home Depot and Walmart. Weiner agreed, saying that because Americans tend to spend their annual refunds, “the smaller refund would mean less of a demand boost to the economy.”
However, the Bankrate survey found that only 3 percent of respondents planned to splurge their refunds on retail purchases. Instead, 28 percent said they will use the money to pay down debt and 26 percent they would use it to boost their savings.
Weiner pointed out that there could be other factors, aside from the expiration of tax credits, that contributed to the drop in total tax refunds this year. For example, fewer people may have over-withheld their taxes during the year or more people may have changed jobs, which could have resulted in a larger income.
Caroline Bruckner, a tax professor at American University, told Newsweek that her latest research shows that widespread tax literacy gaps, particularly among small-business owners and independent contractors, play a big role in ensuring that taxpayers know when to file correctly. Without closing those gaps, business owners are unable to use “their own tax savings as a strategy to access capital.”
Last year, tax filers experienced massive backlogs, with roughly 9 million filings still unprocessed in late 2022. But the IRS said that those who file electronically with direct deposit and have no issues with their returns should expect their refunds within 21 days this year.
“The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence,” National Taxpayer Advocate Erin Collins, who is the “voice of the taxpayer” at the IRS, said in her annual report to Congress in January. “We have begun to see light at the end of the tunnel. I am just not sure how much further we need to travel before we see sunlight.”