Tax Refunds 2024: Why You May Be Getting Back Less This Year

  • Early IRS data suggests the average taxpayer will receive a materially smaller refund this year. 
  • This shift could be due to a number of factors, including the rising prevalence of gig work. 
  • While not necessarily a good or bad thing, taxpayers will need to keep these trends in mind when planning out Q1/Q2 purchases.
tax refunds 2024 - Tax Refunds 2024: Why You May Be Getting Back Less This Year

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Unsurprisingly, many 2023 return filers are seeing smaller refunds than the average of $1,963 from the previous year. As of February 2, 2024, the average refund was $1,395. Since the tax filing season is still early, more returns filed may result in bigger refunds.

However, early reports from the IRS data showed this year’s tax refunds are falling. With an average refund of $1,741, this number is 13% less than the previous year and 46% less than the $3,252 overall season average for 2023.

A large refund is nice, but it represents an annual overpayment of taxes. Using IRS forms to change your refund amount is simple and quick if all the paperwork is in place is a good idea. Thus, maybe there’s a silver lining here.

Additionally, tax refunds can differ because of income, credits and deductions. In 2024, inflation-driven changes to the standard deduction and tax brackets may give larger refunds for those with unchanged financial statuses. However, because of the 2023 tax year adjustments, some may find their refunds more significant. Other factors making waves on refunds include student loan interest, tax credits, job changes, raises and investments.

Let’s dive deeper into why tax refunds in 2024 may change.

IRS Says Tax Refund Is 29% Lower

The IRS issued over 2.6 million refunds, totaling $3.65 billion as of February 2. The average refund came in at $1,395, a 29% decrease from last year. Still, the IRS hints that it’s a promising start to the 2024 filing season, with statistics based on only five days compared to the previous year’s 12 days.

Jackson Hewitt Chief Tax Information Officer Mark Steber warned against concluding this early data on refunds for the 2023 season. That is because, as of December 29, the average return was $3,167. Many early filers have not yet filed, including those who get child tax credits and earned income tax. The IRS said refunds for those claiming these credits are legally withheld until at least February 27.

Other experts have explained why early filers may have gotten smaller tax refunds this year. Some workers may have had salary increases that didn’t adjust their tax withholdings, and others may have worked with their HR departments to withhold less from their paychecks. These are generally positives.

One of the factors to pay attention to is growth in the gig economy, where workers usually earn wages without traditional tax withholdings. Gig workers may have kept their estimated tax payments the same, which led to smaller refunds or even taxes owed.

Plus, investment income plays a part in the issue, with stock market growth being another key factor. Some filers may have earned more, leading to more tax liabilities and smaller refunds. Experts have also cited the complexity of tax situations and the different factors hitting refund amounts.

Are Lower Refunds Entirely a Bad Thing?

A smaller tax refund in 2023, though disappointing to think about, means less money held by the IRS, as refunds are returns of withheld earnings. Losing $300 from a $900 refund means more money went to consumers’ paychecks last year. Leaning on large refunds for bills or debt is a red flag because of how unpredictable refunds are. Thus, learning how to cope with smaller refunds requires new strategies from taxpayers.

Overall, these numbers don’t seem to be concerning and could indicate taxpayers are looking to put more money in their pockets every two weeks. That’s broadly a good thing.

Reasons Why Tax Refunds Can Be Low

Many Americans may be concerned about the incoming smaller tax returns this year. A TaxAct study said that 25% expect reduced refunds in 2023 compared to 2022. On the other hand, 35% expect similar refunds. Some of the concerns are income changes, policy shifts and filing issues.

Factors that can make taxpayers’ refunds this year smaller include changes in dependents, filing status and employment or self-employment income. IRS data hints that these changes could significantly affect refund amounts in 2024.

The tax law changes are causing reduced refunds, with salary deductions affecting tax burdens. Clear credit reports, deductions and income are crucial to avoiding errors. Processing delays because of incomplete documents can also lower refunds. Income fluctuations may push individuals into high tax brackets, leading to larger tax bills.

Tax laws can affect itemized deductions and refund values; one example is the Tax Cuts and Jobs Act of 2017. Limited tax credits may also shape refunds, including the Earned Income Tax Credit, Child Tax and Dependent Care Credits. Even unforeseen life events like property sales or marital status changes can affect refunds.

Why Some Refunds Can Be Bigger

Overpaid taxes usually lead to refunds, while insufficient payments lead to owed taxes. Inflation could increase refunds if the income doesn’t match inflation because of IRS adjustments. Congress’s pending tax legislation may retroactively improve the child tax credit for 2023, which could increase refunds.

IRS Commissioner Danny Werfel cautioned taxpayers to file on time, but a survey in January said a good number plan to file in March or later because of stress and because of the complex process.

Bottom Line

Smaller tax refunds can cause financial strains and delay plans for workers, especially those relying on refunds for expenses or to pay back debt. But there, the refunds give out immediate financial flexibility, allowing for debt reduction, bill payments or discretionary spending.

If you want to know your refund amount, complete your tax return electronically, choose direct deposit and ensure it’s accurate for quicker processing. Start the process immediately to get refunds in the 2023 tax year and miss out on IRS inquiries.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.


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