Americans Are Using Their Tax Refunds To Pay Off Bills and Debt: Here’s Why That’s an Issue

A young African-American man sitting at a table at home, paying bills.
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Although most people don’t get any pleasure from doing their taxes, they look forward to their refunds as if they’re rewards earned for completing the task.

According to a new GOBankingRates study of more than 1,000 people, most Americans expect to get somewhere between a few bucks and $2,000 back from the IRS when they file their returns this year. Another 14% expect to receive between $2,001 and $3,000 and 12% are looking forward to refunds of more than $3,000.

But many won’t get to experience the good things that kind of money can buy.

About 1 in 3 have plans to save or invest their refunds and much smaller percentages will use them to splurge on vacations or other treats for themselves. But the largest group — about 4 in 10 — will say goodbye to their refunds without ever enjoying the money, which they’ll have to spend on bills and debt instead.

The Results Are a Testament to the Financial Rigors of 2022

According to Colin Palfrey, CEO of the personal finance site Crediful, the results of the survey indicate a marked difference from years past.

“Usually, most people can use at least a part of their refund for more pleasurable pursuits than simply paying bills,” he said. “We tend to look at a tax refund as a bonus, and really, it should be spent on something we enjoy.”

But given how the last year ran America through the financial wringer, the sudden change isn’t hard to understand — but it is unsettling.

“The fact that most people are using their tax refunds to cover living expenses is not very surprising,” Palfrey said. “But it is quite worrying. The current cost-of-living situation has put us all in a place where all our financial matters are geared towards getting by at our current level.”

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He speaks of the four-decade-high inflation that spent much of the last year bleeding household wealth while rising interest rates made money more expensive to borrow.

“If we have to use the tax refunds to maintain that then so be it,” Palfrey said. “It is slightly worrying, though, that we cannot count on our regular income to meet all our costs.”

Inflation Coincided With the End of COVID-Era Benefits

The survey’s results are no surprise to Dr. Lei Han, Ph.D., a CPA, associate professor of accounting at Niagara University and a member of the American Accounting Association.

She outlined why 2022 was a unique year for all the wrong reasons for millions of taxpayers.

“Some pandemic-related credits and deductions are gone, and the Social Security tax wage base has gone up for the 2022 tax year,” Han said. “The Child Tax Credit reverts back to $2,000 in 2022. The EITC goes back to $500 for 2022. The child and dependent care tax credit is down to $2,100 for 2022 from $8,000 for 2021. For taxpayers who don’t itemize, the $300 deduction — $600 for married couples — for above-the-line charitable contributions is gone for 2022. The Social Security tax wage base has increased for 2022 to $147,000, up from $142,800 in 2021, and there was no stimulus check after 2021.”

Those pandemic-era benefits and others helped people cover their bills and debt with at least some of their refunds left over for saving, investing, traveling or splurging.

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But in 2022, they all disappeared at the same time. 

Pandemic-Era Savings Are Drying Up

Han cited data from the Federal Reserve and Bureau of Economic Analysis to help explain why so many people will use their refunds for the unglamorous expenditures of bills and debt.

From the start of the pandemic through the summer of 2021, America’s savings accounts grew by $2.3 trillion thanks to stimulus payments and shutdown-induced spending reductions. Savings as a percentage of disposable personal income peaked at nearly 34% in early 2020. But inflation gnawed away at those gains as households had to spend increasingly more to maintain the same living standards.

By the end of 2022, the savings rate plummeted from the mid-30s to rock bottom in the low single digits.

“In the last few months, according to BEA, the U.S. personal saving rate as a percentage of disposable personal income was around 2%-3%,” Han said.

In short, millions of households that were briefly flush with a comfortable savings cushion are back to living paycheck to paycheck like before the pandemic — and they’re spending their refunds on debt and bills because they have no other choice.

It’s Part of a Larger, Longer Trend Toward Insufficient Savings

In terms of personal wealth, the pandemic was more of a blessing than a curse to millions of American households — most people were desperate for stimulus even long before the virus. In 2019, the Federal Reserve Board reported that only about 6 in 10 American families had the cash or cash equivalent to cover a $400 emergency.

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The percentage that could deal with a four-figure crisis was much smaller.

The stimulus payments of 2020 and 2021 provided millions of households with more savings than they had ever had before — and now, unfortunately, the old normal is making a comeback. A different GOBankingRates survey showed that around half of people don’t have any emergency savings at all and many others have just a few hundred dollars to deal with an unforeseen crisis.

“The trend serves as a testament to the precarious financial position of many households, indicating a shortage of savings to cover unexpected expenditures and emergencies,” said Fluent in Finance founder Andrew Lokenauth, an investing and banking professional who held senior positions at Goldman Sachs, AIG, and other major institutions. “Additionally, it reveals the economy’s effect on families, as the combination of economic volatility and stagnant wage growth exacerbates financial distress.”

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Methodology: GOBankingRates surveyed 1,002 Americans aged 18 and older from across the country on between January 30 and February 1, 2023, asking fourteen different questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund?; (5) Do you feel confident you are receiving all the deductions you feel qualified for?; (6) Do you believe your tax dollars are being spent effectively?; (7) Do you believe you are paying too much, too little, or a fair share in taxes?; (8) Have you ever been audited before?; (9) Who will/would use your tax dollars the best?; (10) How much is the standard deduction for a single filer (and married filers) in 2023?; (11) What concerns you the most about Tax Day?; (12) Do you expect your tax refund this year to be more or less than last year?; (13) What do you understand the least about your taxes?; and (14) What would you rather be doing than your taxes? (Select all that apply). GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

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