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Troubled economy? Tax credits to the rescue.

As Americans file their taxes Wednesday, many are getting a financial boost from recent tax changes that give consumers money to pay debts and buy cars.

By Staff writer / April 14, 2009

A woman receives help from an IRS employee in Boston in this 2005 file photo. With this year's tax deadline approaching, changes and larger-than-usual taxpayer refunds are providing a burst of money to the struggling US economy.

Melanie Stetson Freeman/Staff/FILE


Tax changes and larger-than-usual taxpayer refunds are providing a welcome burst of money to the struggling US economy as Wednesday's tax-filing deadline arrives.

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The impact of this "tax stimulus" won’t by itself push consumers back into shopping malls. One key reason: In a tough economy, consumers are more apt to use extra cash to pay down old debts than to make new purchases.

But this stimulus is still important. As many as two-thirds of Americans will get a refund, with at least a portion of that money likely to end up in the marketplace.

The tax changes are an early piece of a larger effort by federal policymakers to bring the recession to an end this year.

The impact flows through a variety of channels:

- Refunds to taxpayers are averaging about $2,700 – or $200 more than last year, the Internal Revenue Service (IRS) estimates. The IRS says that refunds will total $300 billion this season.

- Starting now, give or take a few weeks, the IRS will take a smaller bite out of millions of Americans' paychecks. This is the “make work pay” tax credit, and it is a central feature of the $787 billion stimulus act that President Obama signed in February.

- Other tax breaks from the stimulus act are nudging some Americans to buy houses, cars, college educations, or energy-saving home improvements. Homebuyers can claim a credit of up to $8,000 on their 2008 taxes even if the purchase is made this year.

- Many businesses that are struggling with losses this year have a new opportunity to get back tax money they paid to the IRS in the previous five years.

“We’re making an impact. We’re getting real money into people’s pocketbooks,” Doug Schulman, the nation’s commissioner of Internal Revenue, said in a speech this week.

He gave anecdotes of the impact the tax changes have already had – ranging from an Indiana family using tax credits to offset the rising cost of college tuition to two window manufacturers that have driven up demand for their windows by touting the tax credit for people who improve the energy efficiency of their homes. The result has been jobs for 300 unemployed workers in Minnesota and West Virginia.

All this doesn’t mean the economy is turning a corner toward recovery right away. The total Obama stimulus package – including spending measures as well as tax breaks – may not outweigh the negative forces weighing on consumers, such as lost housing wealth. Moreover, concern about rising layoffs continues to hold back the economy.