As Tax Refunds Tackle Debt, Installment Payments Become a Budget Tool

This time each year, millions of consumers in the United States tell themselves comforting but misleading stories about their tax refunds.

One story is that the check from the U.S. Treasury is “found money” or a “windfall.”

What it actually signals is that you withheld too much from your paycheck. That means you effectively gave the U.S. government an interest-free loan of your hard-earned dollars when instead you could have boosted your cash flow throughout the year.

Another story is that a refund is the fruit of “forced savings.”

It sort of is, but only because you’re not building up cash each month for emergencies, consumer debt and long-term savings.

Together, the mental shortcuts belie the fact that it’s better to reduce the number of withholding allowances on your W-4 so that your employer takes less out for federal and state taxes throughout the year, leaving more after-tax cash in each paycheck.

As the annual tax filing season shifts into high gear, there’s a new story about the value of tax refunds. Unlike the heuristics consumers use to frame their financial decision-making, it’s rooted in data. And it doesn’t paint a pretty picture for the nearly 7 in 10 consumers living paycheck to paycheck, including 42% of all Americans (about 111 million people) who exist that way not because they choose to but because they don’t have any other option.

More and Less

Tariffs on imported goods, from clothing and furniture to toys and coffee, are wiping out much of the value of refunds this year. That’s despite congressional lawmakers passing sweeping legislation in July that increased the size of the federal refunds now being sent out.

The One Big Beautiful Bill Act made permanent the individual tax cuts in the 2017 tax code overhaul, which lowered all but the lowest individual tax bracket. It also effectively quadrupled the deduction for state and local taxes until 2030, including those all-important property taxes; introduced a new deduction for auto loan interest; made permanent a higher standard deduction; boosted the Child Tax Credit and the seniors tax deduction; and removed taxes on tips and overtime.

Full-time employees who aren’t self-employed contractors likely saw larger paychecks last year, but they used them to pay for more expensive goods and services.

Tariffs erase between 70% and 95% of their value for consumers in the middle three income quintiles, which includes most consumers, according to the Tax Foundation, a non-partisan think tank.

Overall, average tax cuts from the July tax bill range from $245 to $1,981 for all consumers, save the lowest-income ones, who have little or no income tax liability and thus tiny or no refunds.

But that money goes to purchases that are now more expensive. The average household now pays $1,751 more for the same, pre-tariff items, according to the Yale Budget Lab.

“The tax man giveth, but the tariff man taketh away,” Erica York, the Tax Foundation’s vice president of federal tax policy, wrote in a Feb. 8 post on social platform X.

The tax man giveth but the Tariff Man taketh away. https://t.co/uUB6atKY92 pic.twitter.com/38DzPyZhUj

— Erica York (@ericadyork) February 8, 2026

Refund Redux

Tariffs are often called a tax.

U.S. households and businesses paid for nearly 90% of the tariffs in 2025, including 94% of the levies from January to August, 92% from September to October, and 86% in November, the Federal Reserve Bank of New York reported Thursday (Feb. 12).

Bye-bye, helpful refunds.

The average tax refund in the first week of February was $2,290, according to the IRS, up 10.9% compared to a year ago. By the end of 2025, the average tariff rate was 13%, per the New York Fed.

Today’s economy can be described as K-shaped, where two broad groups of consumers are experiencing different financial pressures. Consumers with high incomes are thriving and spending at the top arm of the K, while the majority (the bottom arm) are struggling. Just look at the new “Love in This Economy” message on those candy conversation hearts for Valentine’s Day this year.

Moody’s economist Mark Zandi found that the top 10% wealthiest Americans drive nearly half of all consumer spending. That still leaves millions of consumers at the bottom arm of the K struggling and in need of flexible payment plans.

On Black Friday, 58% of paycheck-to-paycheck consumers who struggle to pay their monthly bills used credit card installment plans, up from 49% the year before, PYMNTS Intelligence data revealed.

The February PYMNTS Intelligence report “Tax Refund Season Reveals the Reality of Paycheck-to-Paycheck America” found that low-income consumers face a double whammy. They’re less likely to receive money back from the government. Just over 4 in 10 consumers earning less than $50,000 a year get a federal or state refund, compared to more than 6 in 10 of those earning more.

Possible reasons include not earning enough money to be required to file a return (the thresholds are $15,750 for individuals and $31,500 for married couples under age 65) and performing gig economy work, which doesn’t involve an employer withholding taxes and requires the filer to prepay their own taxes quarterly.

Overall, roughly 56% of all consumers got a refund last year, indicating they have their withholdings set Goldilocks-just-right, according to the PYMNTS Intelligence report, which surveyed 2,486 consumers in the second half of January. Some 11.4% were unsure, so the total share receiving refunds is likely higher.

How people spend their refunds depends on their financial lifestyle. There is a gap between consumers who treat the money as a lifeline versus those who use it as a wealth-building tool. Paying down debt figures heavily. The report found that 20.3% of consumers plan to do that this year, up from 18.2% last year. So does reining in large necessary expenses, perhaps for healthcare or car repairs. Among people living paycheck to paycheck, 6.5% plan to spend a refund that way, down from 10.2% last year.

The Federal Reserve’s most recent Beige Book showed that high-income consumers are driving discretionary spending, particularly for travel, tourism and experiences. In contrast, low- and moderate-income households are increasingly price sensitive and hesitant to spend on nonessential goods and services.

Maybe some of next year’s candy conversation hearts should read “Love in this K-shaped economy.”

Read more:

Running on Empty: How Paycheck-to-Paycheck Living Turns Small Shocks Into Big Crises

How Financial Support Beyond Family Is Breaking Household Budgets

Income Instability Is Redefining the Paycheck-to-Paycheck Economy