Navigating the Tax Refund Landscape: What You Need to Know

As we approach the tax season, many taxpayers are already preparing for what’s to come. Recent data from the IRS indicates that the average tax refund this year is a stark 32.4% lower compared to last year. The average refund amount stands at $2,169, down from $3,207 just a year ago. This decline is a crucial concern for many as inflation continues to eat away at hard-earned dollars. Here at Extreme Investor Network, we aim to empower you with the knowledge to make informed financial decisions, especially during these pivotal times.

Understanding the Current Tax Refund Landscape

The downturn in average refunds comes as tax season officially opened on January 27. While it may seem alarming, it’s important to understand that this figure only reflects current-year refunds filed as of February 14. Notably, this data does not account for clients receiving the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), both of which typically boost refunds significantly and will not be issued until after mid-February. In fact, these tax credits can sometimes result in five-figure refunds!

For those unaware, a refund generally occurs when individuals have overpaid their taxes through paycheck withholdings or quarterly estimated payments. Conversely, a tax bill arises when insufficient amounts have been remitted.

A Historic Trend: Refund Numbers vs. Seasonality

While the numbers may appear grim now, it’s essential to recognize a historical trend: filing season numbers often even out as more returns are submitted. As of February 14, the IRS had received about 33 million individual tax returns and anticipates processing over 140 million before the April 15 deadline. This means there’s still ample time for many taxpayers to file their returns and potentially alter the average refund landscape as the season progresses.

In the previous year (2024), the average refund was recorded at $3,138 by the end of December, only slightly dipping to $3,167 by the end of December 2023. With the current numbers still early in the tax season, there is potential for growth as new tax returns are factored in.

Pro Tips: Avoiding the IRS Hang-Up

In today’s digital age, dealing with tax refunds should ideally be less stressful. Experts recommend not to call the IRS for status updates—chasing that elusive refund over the phone may lead to frustration rather than the information you seek. Instead, utilize the IRS’s "Where’s My Refund?" tool or the IRS2Go app, which are readily available to check refund statuses, 24/7.

Typically, refunds are issued within 21 days of receiving a return, but some situations may require additional review, consequently extending wait times.

Proactive Steps for Tax Season

To avoid any complications, here are some proactive steps to take this tax season:

1. Double-check your returns: An accurate return may help you receive your refund on time, reducing the need for communications with the IRS.

2. Educate yourself on tax credits: Know what tax credits (EITC, ACTC, etc.) you may be eligible for, as they can significantly impact your refund.

3. Utilize resources: Leverage tools at your disposal, like tax preparation software or consulting with a tax professional, to navigate complex tax situations smoothly.

4. Be strategic with withholdings: Consider adjusting your paycheck withholdings for the coming year to minimize the chances of large refunds, which in essence are interest-free loans to the government.

At Extreme Investor Network, we aim to sound the alarm on financial awareness so you can make educated decisions that impact your future positively. Stay informed, stay prepared, and transform the way you approach tax seasons for years to come!