With tax season underway, our U.S. economist explains what the average refund will look like and how people are likely to spend it.

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Welcome to Thoughts on the Market. I’m Sarah Wolfe, from the Morgan Stanley US Economics Team. Along with my colleagues bringing you a variety of perspectives, today I’ll talk about the US federal tax refunds season. It’s March 5, at 10 AM in New York.

The IRS began accepting tax returns for the 2023 tax year on January 29, 2024. This is about a week later than when they started accepting tax returns in 2023. As a result, the number of refunds and the total amount of refunds issued by the end of February is about 12 per cent below where they were at the same time last year. However, if we look at the average refund amount that households are getting in the third and fourth week of the tax refund season, they are about in line with the prior year.

As such, we expect that total refunds will ramp up to an average amount similar to last year; so that’s about $3100 per person. While data show that refunds can fluctuate notably on a weekly and daily basis, total tax refunds through the end of February ran about in line compared to the same period over the past five years. Let’s remember though that they’re not going to be as high as 2022 when refunds were much larger due to COVID-related stimulus programs. So, we can compare it to the past five years apart from 2022.

February through April remains the period where most tax refunds are received and spent, with the greatest impact on consumer spending in March. Our own AlphaWise survey of household intentions around the refunds reveals that households typically spend about a third of their refunds on everyday purchases – such as grocery, gas, apparel. Another third goes toward paying off debt, and the remaining third into savings.

Last year, higher inflation pushed more households to use their refunds on everyday purchases. This year, it is likely that everyday purchases will remain a top priority, but we do think that more refunds will go in towards paying off debt than last year. There’s a couple of reasons why we think this. First, there was an expiration of the student loan moratorium at the end of 2023. This is affecting millions of student loan borrowers and putting more pressure on their debt service obligations. And then we’re also seeing rising credit card and consumer loan delinquencies, which reveal pressure to pay down debt. If we look at spending intentions by income group, upper income households are more likely to save any tax refund they may get or spend it on home improvement and vacations. So, a bit more on the discretionary side.

When we think about tax liabilities instead of refunds, anomalous factors make this year’s tax season a poor comparison to last year – because last year several states got an extended deadline due to natural disasters. A delayed Tax Day largely impacts filers who have a tax liability or a complicated financial situation and prefer to file later. This has larger implications for the fiscal deficit since delayed tax remittances caused a larger deficit in the third quarter of 2023, and then it narrowed in the fourth quarter when remittances came in. But in terms of refunds and consumer spending, filers who expect refunds tend to file early and on time. An extension of the deadline has very little impact on this group of consumers.

All in all, based on early data, we think that total tax refunds this year will be similar to last year, though higher than pre-COVID years due to inflation. Barring factors that can lead to a significant shift of the filing deadline, we should see a more normal timeline for tax remittances, but it is still important to track closely how the tax season evolves.

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