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Americans are facing shrinking tax refunds as inflation remains high

The average refund so far this tax season is just under $3,000 — down about 10% from a year ago, according to the IRS. Reductions in refunds and the end of certain pandemic-era relief policies are putting pressure on many.

Matt and Heather Mohalski own a custard store near Atlanta, and inflation is eating into their profit margins. The couple expected their usual healthy tax refund this year.

“This little bit of extra money helps us deal with the seasonal nature of our business and the variable costs of our business,” said Heather Mohalski.

During the COVID-19 pandemic, the Mohalskis relied on government stimulus checks, while a PPP loan kept their business afloat and child tax credits for their two children boosted their refunds.

Two years ago, that refund was $8,800. Last year it dropped to $1,700. But this year, the couple owes $3,100.

“It’s a rude awakening,” Matt Mohalski said.

About 70% of Americans are worried about tax refunds this year, according to a Bankrate estimate, mainly because of the expiration of pandemic relief programs. The extended child tax credit, for example, was reduced from $3,600 to $2,000 per child.

“There’s nothing we can do but respond to it and manage the money,” Matt Mohalski said.

Now is the time to get ahead of next year’s tax return, says accountant Drew Pauls. He said, the key is planning.

“Contribution plans for health savings, plans for contributions to retirement accounts, plans for contributions to college savings funds,” he said.

Experts like Poulos recommend double-checking for any missing deductions, and for next year’s refund, consider adjusting your withholding now.

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