Everyone loves their income tax refund and many people depend on the cash to make ends meet.
This year, there’s anxiety mixed with that anticipation, according to a survey released Tuesday.
Smaller-sized refunds, potential IRS processing delays and diminished purchasing power due to inflation are the three top concerns of people who are expecting a cash infusion from the taxman, said a Bankrate.com poll of almost 2,500 people.
• For people expecting refunds, two-thirds had concerns.
• The two most-cited worries are a smaller payout in their refund (29%) and that their refund will not provide as much help with their finances due to inflation (29%).
• Another concern was processing delays (24%) and the potential of rising interest rates cutting into their refund’s purchasing power.
Here’s the bad news: It’s understandable why people in the Bankrate.com poll are concerned.
Chance of smaller refunds
The 2022 tax season, which started Jan. 24 and ends April 18, comes after the IRS paid out the first half of the enhanced child tax credit.
As part of the $1.9 trillion American Rescue Plan, lawmakers increased the payout on the credit from $2,000 to $3,600 for households with kids up to age 5. They raised the maximum payout to $3,000 per child age 6 to 17.
The first half of the boosted credit was paid in advance in monthly payments from July to December.
Unless a household opted to get all the tax credit money at once, they will be getting the second half lumped into their tax refund. The problem is, one half of the enhanced credit, $1,500 or $1,800, is still smaller than $2,000.
Some tax preparers say they’ve been bracing clients for smaller refunds as a result — but it still might sting when they see the slightly shrunken refund. (Bear in mind, lawmakers also increased the payouts for the Child and Dependent Care Credit for 2021. So it’s possible more money there could offset lower lump sums from the Child Tax Credit.)
“Many Americans will get smaller refunds this year because they already got half of their child tax credit funds in monthly installments during the second half of 2021,” Ted Rossman, senior industry analyst at Bankrate.com, said in a statement. It was “no wonder” that millennials (37%) and parents with kids under age 18 (37%) were most likely to say they were worried about the size of their refund, he added.
As of Feb. 11, the IRS had issued 8.9 million refunds for an average $2,323. By early December, the average refund for last year’s returns was over $2,800. Though that’s a $600 difference, remember there are still millions of 2021 returns to be filed which can bring up the average payout. (The $2,323 average is in contrast to the $1,900 average at a comparable point during last year’s tax season.)
Inflation’s effect
Tax season is coinciding with red hot inflation. The January read on the Consumer Price Index showed a 0.6% rise in prices from December and a 7.5% rise from one year earlier. The 7.5% is a 40-year high.
If prices keep drifting up, that means the refund goes a little less far. And if the Federal Reserve increases interest rates — which many expect to happen beginning in March — other increased borrowing costs reach the consumer. That includes higher annual percentage rates (APRs) on credit cards, which make it more costly to carry a balance month to month.
The worry about a refund not stretching as far due to higher interest rates was cited by 15% of the people in the Bankrate survey.
It doesn’t help that many inflation-indexed parts of the tax code, like the income tax brackets and standard deduction, were adjusted before the pace of inflation in 2021 and 2022 really started ratcheting up. It also doesn’t help that some tax rules haven’t been adjusted for years.
Delayed tax refunds
Another top worry in the Bankrate.com survey has to do with the chance for IRS processing delays. Even before tax season started, the IRS was warning people there could be headaches and lags turning around refunds.
If there are no errors or glitches, the IRS says it can still get refunds issued in less than 21 days. But there are various chances for potholes and question marks. For example, if the IRS estimate on what it’s paid a taxpayer for the child tax credit don’t match the taxpayer’s own numbers, that could be a hold up. The same goes if there’s a discrepancy between what the IRS says it paid a household for the third stimulus check and what taxpayers say they are owed.
IRS officials have been moving around staff and cutting back on sending written notices to taxpayers to simultaneously cut back on a tax return backlog from last year and handle the influx of returns coming now. The IRS had 23.5 million in back inventory, including tax returns from last year — and some submitted this year, according to National Taxpayer Advocate Erin Collins.
To get refunds as quick as possible, taxpayers should be extra sure their returns are accurate. They should file their returns electronically and have refunds sent via direct deposit into their bank accounts instead of paper checks in the U.S. mail, the IRS says.