When Heaven Richardson received her tax refund of $3,000 last year, she had enough to put some away into an emergency fund and some away for a special occasion. She had money to rent out a hall for her daughter’s second birthday party along with extra gifts. The theme for the party? The 2022 animated movie “Trolls.”
“The party was already something that I had planned,” Richardson, a 23-year-old Columbus, OH, resident, said. “But as far as, like, getting the extra-extra stuff that we bought her—it was just because we had the extra money.”
This year, though, Richardson received a much smaller refund — about $2,000. It was what she was expecting — but the smaller number does mean the extra-extras might have to get covered another way.
Richardson and millions of other low- and middle-income Americans got extra cash back from the government last year because of policies put in place as part of the American Rescue Plan, the $1.9 trillion pandemic relief package passed early in President Biden’s term. The plan boosted credits like the Earned Income Tax Credit, the Child Tax Credit and the Child and Dependent Care Credit in an effort to help families and low-income single taxpayers weather the pandemic. The expansion of these credits made more low-earning taxpayers eligible to get the extra money, even if they had little to no federal income and they had no children.
However, the monthly payments from the Child Tax Credit ended in December 2021 and the large tax-season lump sum for the Earned Income Tax Credit was at its most expansive for 2021 returns. This tax season, all of the tax credits aimed at families and low- and middle-income taxpayers that were temporarily expanded under the American Rescue Plan fell back to 2019 levels. Many taxpayers are now seeing smaller refunds than they did last year. The average refund this year has fallen by more than 11% compared to this time last year, going from $3,473 to $3,049. Some of the decrease can be explained by more accurate withholding — in 2020, the IRS made changes in the W-4 form that employees have on file with their employers that determines how much of their paycheck is withheld for taxes. But the IRS also warned taxpayers about smaller credits because of these extra tax credits that expired at the end of 2021.
The smaller refunds are hitting families hard in a year where most people are paying 6% more for the food, fuel and other goods and services than they did a year ago. The pandemic response has ended, but families are still facing financial hardships in the form of high inflation amid fears of a recession. Consumer spending and wage growth remain high, but are growing more slowly, hinting at more conservative wallets as the year goes on.
Gina Jessop didn’t know her refund might be smaller this year until informed by a reporter. Jessop worked two jobs in 2021, and when she lost one, she didn’t have to search for a new one immediately because the Child Tax Credit backstopped her earnings. Suddenly, she could sit at the dinner table with her child and read her book before she went to bed. As long as the monthly payments came in, she could continue spending time with daughter — and then the money stopped coming. Jessop began looking for work once again.
“She has to stay home by herself,” Jessop, a 44-year old Salt Lake City, UT, resident said about her daughter. “Or I have to pay child daycare, which is just too expensive. I’m living paycheck to paycheck.”
Families like Jessop’s now face tough choices. She used the extra money — up to $300 per month until December 2021 — to pay her rent and buy better food. That’s now given way to maxed-out credit cards, food from the local pantries, often expired, and a general transition to an “impoverished spending pattern and deeper debt,” as put by Bruce Fuller, one of the authors of the study.
“Kids just couldn’t eat breakfast; they were trying to conserve to have a healthy dinner,” said Fuller. “Some families said they couldn’t buy toys for their kids anymore, or pay for piano lessons or dance lessons or sports.”
Indeed, research shows that the expanded tax credits were a lifeline for many families. A 2022 Center for Law and Social Policy study of over 1,000 families found that cash transfers in the form of these credits helped low- and middle-income families start a rainy-day fund, a college fund for their children and buy better-quality food, clothing and essentials, among others. The expanded CTC also lifted more than 3 million children out of poverty.
“Extending the payments would have basically allowed low income families to offset inflation with these payments that would continue to flow into their homes,” said Elaine Maag, a senior fellow at the Tax Policy Center who studied the effects of expanded tax credits. “People are hungrier than they were when payments were coming out the door.”
Maag said that families who benefited from the credits lost a safety net, much like Jessop. Credit card balances grew by the largest amount ever between December 2021 and December 2022 — by $130 billion, according to data from the Federal Reserve Bank of New York. Child poverty also ticked back up after the payments expired, throwing 3.7 million children into poverty in the months after the credit ended.
“We would have seen very low income families would be more stable today, if the child tax credit had been extended,” Maag said.
The credits had immediate effects in 2021: eligible families experienced improved nutrition, decreased reliance on credit cards and other high-risk financial services, and also made long term educational investments for both parents and children, especially among Black, Hispanic and other minority families, per the study. Respondents also said that the credits made them feel like the government cared about their families and welfare.
Besides, some parents also reported having more disposable income for everyday delights and pleasantries, like toys and celebrations, said Ashley Burnside, senior policy analyst at the Center for Law and Social Policy and one of the administrators of the survey.
“One parent said that in the past few years, they hadn’t had the funds to have a birthday party for their child but with the CTC monthly payments they could for the first time, and that’s of course a really important expense for a kid growing up,” she said. “So there’s just all of these really incredible ways that the credit allowed parents to have more flexibility in their budget and for the government to really invest in their children.”
These credits have been a historical mainstay in American tax policy — the CTC since 1997 and the EITC since 1975 — and expanded several times. Tax credit expansion is popular on the bipartisan level, as evidenced by Sen. Mitt Romney’s proposal to consolidate tax credits and ease people’s access, which is still on the legislative table. These credits plug crucial gaps for low-income taxpayers—over 53 million Americans worked low-wage jobs for a median hourly wage of a little over $10, according to a 2019 study.
But many Republicans in Congress, along with some conservative Democrats such as West Virginia Senator Joe Manchin, objected to the expanded Child Tax Credit, arguing for a work requirement and an income cap of $60,000. An effort to make the expansion permanent failed in Congress in late 2021.
In the absence of government assistance boosting low earnings, either through monthly payments or refundable credits, many families like Jessop’s are right back where they began: scrambling to make ends meet. In a Bankrate survey of over 2,000 taxpayers, 907 of whom were expecting refunds, 34% were worried that their refund wouldn’t make as much of a difference because of rising costs and three-quarters said a refund was important to their financial situation.
“We had this temporary, just brief period where we were really aggressively fighting poverty and families had had a little bit more of a cushion. We stopped doing that,” said Jesse Rothstein, an economist at University of California, Berkeley, who has extensively studied the EITC. “You will see families struggling more. That’s a policy choice.”