The majority of U.S. citizens received tax refunds during the 2023 filing season, and the experts urge that the high amount of the refund may not be as positive as it initially appears. The average refund has steadily increased over the past decade, reaching nearly $3,200, but experts predict that this trend may not be in the best interest of recipients due to worsening household debt. Large tax refunds, albeit appealing at first sight, may not actually be beneficial to Americans, advising that individuals would be better off maintaining correct withholding and redirecting that money to earn interest in a bank account instead.
When consumers are faced with record-high borrowing rates and accumulating household debt, affirmatively receiving a large tax refund may be a sign of excessive withholding from paychecks, indicating that many individuals are providing the government with an interest-free loan. In today’s circumstances, particularly when credit card debt continues to grow and balance, the experts argue that minimizing tax withholdings to pay off consumer debts is a more effective use of funds rather than receiving a large tax refund from the IRS. The latest data reveals that nationwide credit card debt balances peaked at $1.13 trillion in late 2023, sending average credit card debt per cardholder to $6,864.
This news highlights that taxpayers have the ability to revise withholding at any time, as the IRS permits individuals to adjust paycheck withholdings by resubmitting a W-4 form to their employer. However, when undergoing significant life changes like marriage or divorce, tax brackets and filing status often change accordingly. The financial experts warn to be cautious of potential underpayment penalties from the IRS, advising that it is both advantageous to receive a slight refund and not end up in a position where available funds are insufficient to pay taxes, incurring penalties with interest.