IRS Issued Over 8 Million Tax Refunds: Americans Feel The Pinch Of Lower Tax Refunds

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The Tax Refund season has just begun in full for most regions in America after the initial hiccup. Though the season officially started on January 23 this year, confusion over the tax status of the inflation relief stimulus check had even the IRS initially confused before it finally gave its ruling on the issue.

The IRS even went to the unprecedented extent of advising Americans residing in states that gave out inflation-linked stimulus checks to wait for clarification from the IRS before filing their 2022 income tax returns. the agency was undecided on the tax status of the stimulus checks given out to residents of twenty-odd states in 2022.

It was only in the second week of February that the IRS finally cleared up the confusion about whether certain inflation relief stimulus checks could be subject to federal income tax.

The IRS informed millions of filers to hold off filing their income tax returns until it issued guidance on whether multiple tax refunds and rebate payments that were issued through 2022 could be considered taxable income and hence should be reported.

California alone sent out over 16 million special Middle-Class Tax Refund payments that were worth $9B. the money was given to counter the high price of gasoline and grocery goods caused by inflation. Till last week it remained unclear whether such payments should be added to income and considered for taxation.

The agency also advised those who received their payments to stand by for further instructions. It also said that those who have already filed their income tax returns should not go for any rectification, the agency further advised.

Despite the statement by the IRS, major tax-preparation companies continued to file client returns. The companies took the position even before the IRS declared that the stimulus check provided against inflation would not be subject to federal taxes.

Many filers who go for earl filing in the season were anxious for the Tax Refunds. They were not willing to wait another week to file their returns as it would also mean a delay in getting their refunds. Hence, they went ahead and filed their returns, despite the IRS advisory.

State tax authorities in California declared even before the IRS that the payments were not taxable for state income tax purposes but could be taxed by the federal authorities. The Golden State issued over 6.4M 1099-MISC reporting forms to the filers who received $600 or more in payments, reported the California Franchise Tax Board. This left every people concerned in a state of confusion.

Others concluded that the payments under the Middle-Class Tax Refund were not taxable by the federal authorities as several payments that promote the general welfare are automatically excludable from federal income. So they are filing for clients who receive the payments but not including payments as being taxable.

The Golden State inflation funds have ranged from $200 to $1,050 and are based on family income and size. For families who received the full payment of $1,050, the extra federal tax pain could be in the region of a couple of hundred dollars.

For filers who have already filed their returns, the agency says it would not recommend filing an amended return at this instance.

The tax status of special payments by the states for inflation is just one of the reasons many filers might receive smaller tax refunds this year compared to 2022.

Many states were flush with funds in 2022 thanks to an economic boom in the last two quarters of 2021. Most states reported huge budget surpluses.

The states were also helped along by the funds amassed from the American Rescue Plan Act of March 2021, signed by President Biden immediately after he came to power.

Retailers Feel The Pain Of Lower Tax Refund Stimulus Checks

Many Americans have already filed their income tax returns but when it comes to income tax returns, most are not much hopeful and are likely looking at less generous Tax Refunds as compared to last year. That could lead to a slowdown in general spending this spring. That could also threaten to slow down the economy. Due to lower spending by Americans.

Much of the economic boom of 2021 was fueled by high spending by low and moderate-income Americans flush with funds. A slowdown in spending could lead to depression. Data from the IRS reveal that while the agency has refunded a higher total amount so far when compared to 2022, it has been because the agency has handled way more fields this year. The total refund amount has risen from $78B to $87.2 this year.

But there has been a significant drop in the average size of the refund stimulus check. It has dropped from $3,536 to $3,140, a sharp drop of 11.2% year-on-year.

The drop was natural and expected. The government 2022 was still working through multiple pandemic assistance, and lawmakers were not able to organize even prevalent programs including the expanded child tax credit stimulus checks.

This gap of over 11% in the 2023 stimulus check Tax Refunds from the IRS could affect low-income Americans the hardest. While for the average Americas, the tax refunds are not much consequential, for low and moderate-income Americans, it is a payment on which they depend to make ends meet, especially following the festive season in the last quarter of the year.

If low and moderate-income consumers find themselves constrained due to the high cost of living that doesn’t seem to end even in 2023, it could affect business, especially the big retailers which see a spurt in purchases in March and April thanks to the Tax Refund stimulus check from the federal administration.

Questions have been raised about the delay of some of the Tax Refunds. The IRS has clarified that some tax returns take longer to process than others for multiple reasons including when a tax return is filed on paper, is incomplete, has errors such as an incorrect recovery Rebat e Credit, and is affected by fraud or identity theft. The return might also need further review in general or includes a claim filed for an Additional Child Tax Credit or an Earned Income Tax Credit.