Every furniture store and car dealer across the nation — and one iconic magical mouse pushing dream vacations and celebrations — has a ready suggestion for how you might spend that big tax refund.
But, maybe, take a deep breath, recognize that income tax refunds can be far smaller this year than last. Some undoubtably will hit a glitch and take far longer to get than you’d imagine. And unfortunately, there are times when that refund will never show up as you expected.
And yes, let’s listen to the likes of Gabriella Barthlow, whose friendly and “not judging” attitude has lightened up everyday conversations about money for years. Spending that cash — before or after you get it — might not be the best move you can make.
Many, but not all, early filers in 2023 — who began e-filing returns Jan. 23 and after — could start seeing their tax refund cash before Valentine’s Day.
The IRS said nine out of 10 taxpayers typically receive refunds in less than 21 days if they electronically file a tax return, the return has no big mistakes or issues and the taxpayer opts for direct deposit of their refund.
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The IRS cannot issue refunds involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February. Extra time is required to review the returns to prevent fraudulent refunds.
But a quick, brutally honest question: Will it take you even less time to spend that refund cash than it does for the IRS to send it? It’s a point worth pondering.
Maybe, this year, Barthlow suggests, you don’t use that tax refund money to pay other people’s bills, and not your own, as you bail a friend or family member out of another financial fiasco.
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Maybe, you step back and realize that it’s not really in your best interest to easily spend a few extra hundred dollars to feed a shoe habit. Or you ask: How much do we really need to eat out?
Barthlow, a financial coach, talks regularly with military veterans about all sorts of money matters, including how to handle tax refund cash, as part of free program through Macomb County Veteran Services. Her coaching experience has included offering financial counseling to military members who are transitioning to civilian life. She listens, encourages and says she serves as an “accountability partner.”
“They tell me what their goals are and I keep them moving,” Barthlow said.
What moves can you make with refund cash?
Someone burdened by debt, Barthlow said, can first consider using that tax refund money to pay down a chunk of that debt. “The quickest way to save money is to get out of debt,” she said.
“Going on a vacation, nothing wrong with that,” she said, “but you’ve got all this debt. And then you come home and you’re like ‘Oh my god, why did I do that?’ “
If debt isn’t a problem, then Barthlow asks: “Do you have your emergency account? And do you know how much you want to have in it that makes you feel safe? Money that you can go to quickly if something comes up.”
Sometimes, many people feel overwhelmed or inadequate when they hear that they should have enough money in an emergency account to cover three months or six months of their regular bills, like rent, insurance, utilities, food and the like.
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Focusing on putting even a small amount of money on the sidelines for emergencies might be the best you can do. And that’s OK.
“For some people, it’s 300 bucks,” Barthlow said. “Ok, if that’s what makes you feel safe. I don’t think anybody needs to dictate. Sure, there are parameters. But sometimes, that’s not real for people.”
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Too often, she said, some consumers will put all their savings in a 401(k) plan or other retirement account. But what will you do if you need a new furnace? You want to avoid taking out loans from 401(k) or taking an early withdrawal that can trigger income taxes and if you’re young in many cases an additional 10% penalty.
“Right now, what will make you feel safe?” she asks. “You’ve got to have that go-to money that has no penalties.”
Other suggestions for refund cash: Set aside extra money to cover some deductibles that consumers need to cover when it comes to car insurance or health insurance. Once savings is addressed, consider bulking up retirement accounts, perhaps a Roth IRA.
If you need to buy a used or new car or want to take a vacation, you can review how that purchase would fit into your overall goals, both short-term and long-term.
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A tax refund shouldn’t just be treated like winning the lottery or free cash because it’s not. It’s your money, including extra money that you had withheld from paychecks for taxes, money that might have been used throughout the year toward savings or retirement or living expenses.
“Here’s my whole issue: Why are we giving the government a free loan all year and we need our money?” Barthlow said.
Someone who is getting $5,000 or $10,000 in a tax refund can look at how they can make adjustments in their tax withholding. “Personally, I break even or I owe,” Barthlow said.
What to expect for a refund
The average tax refund was $3,252 in 2022, up 15.5% from the year before, according to the latest filing statistics data from the IRS that runs through Dec. 30. The average refund was $2,816 in 2021.
For comparison, the average tax refund was $2,549 in 2020 and $2,870 in 2019, based on December data for those years.
This year, though, many individual filers are looking at a smaller refund in 2023 because several key stimulus-related tax breaks no longer exist.
The elimination of the Advance Child Tax Credit and the recovery rebate credit on 2022 returns will mean that some taxpayers will find their refunds “somewhat lower this year,” according to an IRS alert.
Limited changes in the Earned Income Tax Credit, which were in place on 2021 returns but now revert back to pre-2021 rules, could mean a smaller refund for some households.
Last year, for example, the earned income credit was worth nearly $1,500 for those without children who qualified. This year, the amount drops to $560.
On 2022 returns, the minimum age for a taxpayer to qualify for the Earned Income Tax Credit is 25 as of Dec. 31 on the 2022 federal income tax return; the maximum age is 64 as of Dec. 31 for those without qualifying children. The age limits for 2021 were different, enabling more people to qualify.
How to boost your refund
Don’t miss out on generous tax breaks, such as the Earned Income Tax Credit or the Additonal Child Tax Credit.
The Internal Revenue Service estimates that nationwide only four out of five of eligible workers claim and get their Earned Income Tax Credit. So roughly 20% who qualify don’t get their money, leaving billions of dollars going unclaimed.
What happened to my refund?
Check “Where’s My Refund?” on IRS.gov. Or you can use the IRS2Go mobile app.
You’ll need to supply your Social Security or individual taxpayer ID number, filing status and the exact refund amount expected.
You can see three stages of the process by tracking your refund using an IRS tool. First, you can spot when the return is received. Second, when the return is approved. And third, when the refund is sent.
The tool provides an actual refund date as soon as the IRS processes your tax return and approves your refund. “Calling the IRS won’t speed up a tax refund,” the IRS states.
For early filers, the tool should show an updated status by Feb. 18 for most returns involving the Earned Income Tax Credit and the Additional Child Tax Credit. The IRS expects most of those refunds to be available in taxpayer bank accounts or their debit cards by Feb. 28 — that’s if filers selected direct deposit and no other issues will delay processing of their tax return.
Matt Hetherwick, director of individual tax programs for the nonprofit Accounting Aid Society in Detroit, said many EITC eligible clients have reported seeing their deposits by the end of February to mid-March in recent years. The nonprofit offers free tax prepartion help to those who generally make $60,000 or less.
What we don’t enjoy about the wait
Many times, taxpayers don’t realize that they’re looking at even longer delays than normal due to their own situation.
A paper return or an e-filed return can be delayed due to mistakes, missing information or suspected ID theft or fraud.
Many taxpayers would like to be optimistic about their chances for getting a tax refund but it’s important to know that things don’t always work out as you’d hope.
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Sarah Shannonhouse, manager for Tax Practice & Ethics with the American Institute of CPAs, said the IRS may keep — or offset — some or all of a tax refund to pay debt if a taxpayer owes a federal tax debt from a prior tax year, a debt to another federal agency, or certain debts under state law.
“When taxpayers experience a delay in their refund, it can be difficult to tell whether the it will be used to offset debts, or if there’s simply been a complication with your return,” Shannonhouse, said.
You will receive a letter notifying you of the intent to use your tax refund to offset federal payments before the refund has been processed and the letter details the next steps to take. Pay attention to any “Notice of Intent to Offset.” The phone for the Treasury Offset Program call center is 800-304-3107.
Those who owe money for defaulted federal student loans are getting a bit of a break when it comes to offets. The U.S. Department of Education suspended the seizure of tax refunds, child tax credits, Social Security and other government payments to cover money owed for defaulted student loans for 2022 and potentially much of 2023. Collection calls and billing statements will not be sent out. Interest will not add up.
Typically, the IRS is going to tell you up front that a refund will be used toward a debt. But it may take some time to get that official word.
More of your 2022 tax season questions answered
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.
Story Credit: usatoday.com