Tax refunds for some taxpayers may be bigger in 2024 thanks to the inflation adjustments the Internal Revenue Service made to tax brackets implemented in 2023, along with increased standard deductions.
Each year, the IRS adjusts income tax brackets according to a formula set by Congress to account for inflation. High inflation prompted the IRS to raise thresholds by 7% for income tax brackets for taxes on 2023 income. The changes push some taxpayers into lower tax brackets, while those using the standard deduction can deduct more of their tax revenue.
"For 2024 refunds, some relatively large inflation adjustments to tax brackets and the standard deduction should help taxpayers who have not seen a corresponding inflationary increase in their income," Mark Luscombe, Principal Analyst for Wolters Kluwer's Tax and Accounting Division North America said. "Also, in 2023, there were several new or enhanced clean energy-related tax breaks for clean vehicles and energy-efficient home improvements that could also add to taxpayer refunds."
Many Americans got smaller-than-expected tax refunds last year (for the 2022 tax year) after pandemic-era tax credits expired. The Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit were among the affected credits. The average tax refund amount reported by the Internal Revenue Service (IRS) was $2,803 – more than a 7% drop from the average refund amount in 2022, which averaged $3,025.
If you expect a smaller refund this tax season and are struggling to pay down debt, you could consider consolidating it with a personal loan. Credible can help you find your personalized interest rate without affecting your credit score.
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A new tax bill passed by the U.S. House of Representatives includes retroactive changes to the CTC that could further boost refunds in 2024, according to Luscombe.
If passed by the Senate intact, the bill called the Tax Relief for American Families and Workers Act of 2024 would increase the maximum refundable amount per child from the current level of $1,600 per child to $1,800 for tax year 2023; $1,900 for tax year 2024; $2,000 for tax year 2025; and then tie additional increases to inflation for tax years beyond 2025.
"Still up in the air is a tax bill in Congress that would retroactively increase the Child Tax Credit for 2023 for lower-income taxpayers," Luscombe said. "Should that be enacted and made retroactive to 2023, that could provide additional refunds for 2023 tax returns."
The American Rescue Plan increased the CTC from $2,000 to $3,000 per child for children ages 6 and over and to $3,600 per child for children under 6, but it expired at the end of 2021.
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Over half of Americans (56%) said that rising costs, debt and unemployment are why they live paycheck to paycheck, according to a recent TaxAct survey. Moreover, 75% are worried about paying for necessities such as food and utilities (77%) and many don't think their tax refunds this year will help offset these costs.
"We're seeing that financial worries are impacting Americans across the board and are a key point of concern going into tax season," TaxAct Chief Product Officer Bastien Martini said. "People are looking to save as much as possible and make the most of their money."
Besides worrying that tax refunds will be smaller this year, 35% of Americans are concerned about filing their taxes incorrectly and 37% don't understand what deductions to take. Another 29% are concerned they may be audited.
If you think you will receive a smaller refund this tax season but have debt you need to pay down, you could consider consolidating it with a personal loan. You can visit Credible to find your personalized interest rate without affecting your credit score.
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