Key Takeaways
- The IRS reported a lower-than-average tax refund amount in early February. However, some experts believe the final amount disbursed in refunds could be among the highest in recent years.
- Strong inflation led to more generous tax code adjustments in 2024, and slowed wage growth could mean more households had overwithheld and will receive bigger refunds.
- Used-car dealers often see a pickup in business around tax-refund season. This year, some Americans said they might instead use refunds on necessities or to pay down debt.
Americans may be planning to use their tax refunds on used cars and shoes, according to new research. But more could decide to spend it on necessities like rent or groceries, too.
Preliminary data from the IRS found that the average refund amount went down by 32.4% compared to the same period last year, from $3,207 to $2,169. However, the total amount of dollars returned to taxpayers could end up being one of the highest in the past few years, according to a recent analysis from Oxford Economics.
While one report found that Americans tend to spend their refunds on non-necessities, more Americans may use their higher-than-expected returns on essential purchases.
Oxford Economics’ analysis found that used-car dealerships typically saw the most sales activity around the time taxpayers started receiving their refunds, followed by shoe and hobby stores.
A survey commissioned by TaxSlayer and conducted by Talker Research found that a majority of Americans plan to use their refunds on necessities, such as rent, groceries and credit card debt, Only 8% planned to use their refunds on luxuries such as new clothes, entertainment and phones.
Why Might Tax Refunds Be Higher Than Expected?
While the preliminary IRS data found refund amounts were lower than normal, the report did not include refunds from the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC), which are disbursed in mid-February.
Tax refunds are likely to increase as more returns are processed, and could be higher than what was given out in previous years. Strong inflation in 2024 led to more generous annual tax code adjustments, which could mean larger refunds.
When filing their taxes this year, many taxpayers could benefit from increased standard deductions and tax credits like EITC and ACTC, according to Bernard Yaros, lead U.S. economist at Oxford Economics.
Additionally, wage growth slowed last year, likely causing more households to overwithhold on their taxes and receive more in refunds when filing their 2024 tax returns.
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