Many 2024 Tax Refunds Are Being Used to Pay Down Debt
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What is the main topic discussed in this episode?
and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise.
Here's your Money Briefing for Monday, April 1st.
What is the average 2024 tax refund and why does it matter to households?
I'm J.R. Whalen for The Wall Street Journal. The IRS says as of last month, taxpayers have, on average, received a refund of $3,182. That's a nice amount of money to see appear in your bank account. But don't book that vacation just yet. For a lot of people, that check has been earmarked for bills.
Credit card debt is at its highest ever, and people are also starting to fall behind at faster rates. And so that refund is going to matter more, but it's also probably not going to go as far to cover the debts for a lot of Americans.
We'll talk to WSJ's Katherine Hamilton after the break.
What does a tax refund actually represent and how common are refunds?
Listen at schwab.com slash washingtonwise.
Tax refunds Americans are receiving this year are more likely to go toward paying down debt. Wall Street Journal contributor Katherine Hamilton joins me. Katherine, let's start with the basics. What does a tax refund check represent?
A refund, a lot of people see it as found money or new money, but it's really just getting your own money back from the government. Basically, if you overpay your taxes during the year and you have too many taxes withheld from your monthly paychecks, you're going to get that all back as a lump sum around tax season. And the majority of tax filers do get a refund.
How do refund checks typically change consumer spending behavior?
About 65% last year of filers got a refund. So it is a pretty big chunk.
It's nice to get in the mail, isn't it? Yes. How do refund checks typically impact someone's personal finances?
They have a pretty big impact. So like you say, getting that check in the mail, I think psychologically, a lot of people are ready to spend. So the data actually shows that the day after you receive that check, on average, spending spikes about 120%. So tax time is a big time for spending for a lot of Americans.
Which households benefit most from refunds and which tax credits boost low‑income refunds?
And that refund is equivalent to about three months of income on average for folks. So it represents a big sum.
Who will benefit the most from this year's round of tax refunds in terms of household income?
Low-income families definitely are the ones who their tax refund is going to represent the most bump in their monthly income. And that's partly because these families are also eligible for tax credits like the earned income tax credit and the child tax credit. which were actually expanded during the pandemic. So some folks might be familiar with the child tax credit who are no longer eligible. But the low-income families who are eligible for those credits are getting them at the same time as their tax refund. So they're getting a really, really big chunk of money around tax season that's larger than the average or higher-income families.
A moment ago, you mentioned spending spikes when the tax refund arrives. It's nice to run out and buy something when the money pops into your bank account. But how about using the money to pay down bills?
A lot of families do use that money, especially to pay off debt bills. So about 20% of folks said that they're planning to use the majority of their refund to pay off debt. And that's partly because you see people falling behind on their debt increasingly during the holiday season.
How many people are using refunds to pay down debt and what do the numbers show?
It spikes around January. And then once the refunds come in, people are able to catch up on that debt. And you see delinquencies on debt start to decline during tax season. And this year, it's more of an issue because you're seeing debt get to really high levels. Credit card debt is at its highest ever, and people are also starting to fall behind at faster rates. And so that refund is going to matter more, but it's also probably not going to go as far to cover the debts for a lot of Americans. So, for example, I talked to one young man. who said that he was using the majority of his $1,200 refund to pay off credit card debts, but his debts totaled $20,000. So that's only covering a month or two of payments.
He still has a lot left to cover.
This is also the first tax refund many student loan borrowers will receive since repayments resumed last fall.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:01–0:31
2
What is the average 2024 tax refund and why does it matter to households?
0:31–1:20
3
What does a tax refund actually represent and how common are refunds?
1:20–2:24
4
How do refund checks typically change consumer spending behavior?
2:24–2:54
5
Which households benefit most from refunds and which tax credits boost low‑income refunds?
2:54–4:09
6
How many people are using refunds to pay down debt and what do the numbers show?
4:09–5:12
7
How are student loans and rising credit‑card debt shaping how refunds are spent?
5:12–6:18
8
Why might this year’s refunds not be enough to solve Americans’ growing debt problems?
6:18–7:20
Speakers
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