Tax time is a major cash-flow event for U.S. households. In a typical year, roughly four out of five filers receive refunds during tax season. Past JPMCI research has shown that prior to the pandemic, a tax refund was the single largest cash infusion of the year for 40 percent of families, amounting to almost six weeks’ worth of income, and fueling an increase in both spending and balances.

This year tax time could look different. The IRS has reported a significant backlog in processing claims, with as many as six million unprocessed individual tax returns as of December 2021. This has prompted warnings from national consumer advocates that taxpayers should expect their 2022 refunds to be delayed. In addition, families are facing a complicated backdrop of strong labor markets, rising inflation, and receding pandemic-related federal assistance. Will this tax season provide its usual boost to cash balances and spending?

A Profile of Tax Refund Recipients and Early Filers

Tax filers who receive refunds tend to be younger, have lower take-home income, and have less in their savings, compared to those who owe taxes. Early filers, likely to be the first to experience any IRS processing delays, tend to be lower-income households, for whom the tax refund represents an even larger cash flow event. Families who file earliest have cash balances 61 percent lower and incomes 28 percent lower than those who file later.

Historically, families depend on the cash infusion from tax refunds to fuel spending. Cash withdrawals, durable goods purchases, and credit payments all increase by 85 percent or more in the week after a tax refund. But families also use their tax refunds to meet basic needs, such as healthcare expenses and groceries. As shown in the figure below, prior to the pandemic, families increased expenditures on out of pocket healthcare costs by 60 percent in the week after refund receipt. Our research shows that cash flow dynamics impact not only when families pay for healthcare but also when they actually receive healthcare, and this may have larger health consequences if families routinely defer care. Notably, lower income households and earlier filers, for whom the refund has a larger cash flow impact, increase their spending the most. And they spend the largest share of their tax refund on basic necessities like in-person healthcare services. 

Tax Refund Healthcare Spending Infographic

Line chart representing the out-of-pocket healthcare spending per account per day (the difference from average during 6 months leading up to refund). In the six months before tax refund, healthcare spending levels remain very steady. Within the week after the first refund payment of the year, out-of-pocket healthcare spending increases by an average of 60 percent. This elevation in trend remains high until about 76 days after refund, where it drops down to an average of 20 percent.

Source: JPMorgan Chase Institute

Tailwinds and headwinds for family finances

Households face a converging set of headwinds that may impact how families respond to tax time this year. On the one hand, households entered 2022 with higher cash balances, owing to significant fiscal supports in 2021, including stimulus, expanded jobless benefits, and advanced Child Tax Credit payments. The job market, including the most recent January jobs report, is strong, with millions of job openings and scattered wage gains starting to appear.

On the other hand, price inflation adds a potential draw on the purchasing power of both wage gains and tax refunds. Federal assistance programs aimed at mitigating the worst effects of the pandemic have expired, such as expanded unemployment insurance and advanced CTC, leaving households to reckon with the economic impacts of COVID-19 more directly. With half of CTC having been paid out in advanced monthly payments, CTC-eligible families may receive a smaller tax refund this year. The Omicron variant, now receding, caused millions to experience work disruptions. The number of people not working because of a COVID-19 infection or to care for someone infected rose from three million in the first half of December 2021 to 8.7 million by early January 2022 according to Census Bureau data. Without the Pandemic Unemployment Assistance program, many impacted workers had fewer supports to offset those lost wages. Student loan forbearance, providing payment relief to roughly one in six adults, is set to expire in May of 2022, just as tax season wraps up.

As policymakers and others continue to assess appropriate fiscal and monetary policy responses, household balances remain an important bellwether for financial stability and resilience. We will continue to track them as tax season unfolds. 


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