FINANCE
What do Americans spend most of their tax refunds on?
More and more Americans are banking on their tax return to bail them out from debt as more and more people rely on credit for necessities.
The tax season has just closed and late filers will still be waiting for their refunds. With an average payout of $1,543, refunds are actually 25% smaller than last year. Anyone relying on these payments for living is in for a rude awakening. Indeed, 1 in 3 Americans is depending on a tax refund to make ends meet in 2024.
The combination of inflation and potentially smaller refunds creates a perfect storm for many Americans. Those who were already struggling financially are likely feeling the pinch even more acutely. Empower, a financial advice company, has published a survey of more than 1,000 people to find out how taxpayers are planning to spend their refund.
The survey reveals that 41% of Americans are relying on a tax refund to pay debt, a very worrying statistic. Nearly half are counting on their refund to combat rising inflation, which has driven up the cost of everyday essentials. Even more concerning, 1 in 10 Americans is depending on their tax refund to make their mortgage payment.
This heavy reliance on refunds highlights a larger issue – financial insecurity for a significant portion of the population. The survey underscores this point further, with over half (54%) of respondents anticipating a smaller refund this year compared to previous years. Nearly a third (29%) expect their refund to be under $1,000.
The ever spiralling household debt in the US
Household debt in the US is at a record high. As of Q4 2023, it sits at a staggering $17.5 trillion. With debts continuing to increase, while tax refunds fall, its a recipe for serious worry among households. With reference to the statistic of 2 in 5 Americans relying on tax refunds to pay debt, the reduced amounts are unlikely to cover what they need.
Household debt has increased by a 20% since the beginning of the pandemic.
This amount of accrued debt could not have come at a worse time due to Federal Reserve interest rates being at their highest level in more than 20 years. During Q2 2020, the Fed reduced interest rates to a mere 0.25%, making many payments like mortgages virtually interest free. However, with rates now as high as 5.5%, anyone holding debt now is paying much more than they bargained for.
Indeed, it is not yet clear when these interest rates will come down as they had been expected to do in 2024.
“Recent data have clearly not given us greater confidence [to reduce rates]”, Fed chair Jerome Powell said on Tuesday. “If higher inflation does persist, we can maintain the current level of [interest rates] for as long as needed.”
As some reprieve, these increased debt payments have not yet been reflected in mortgage default data.
American households are more reliant on credit than ever. With the significant amount of taxpayers needing an effective bailout increasing, further economic hardship could be expected.