Seasonal Trends: The Potential Impact of Tax Refunds on Rent Payments

Key Takeaways

• On-time payment rates increase during tax season for renters with poor-to-fair credit scores. 
• The same increase in on-time payments is not found for those with good-to-excellent credit scores. 
• Planning for an increase in on-time payments can help, both, landlords and renters.
  • Landlords can better manage their cash-flow planning by accounting for less rent delinquency, a potentially better ability to meet security deposit requirements, and planning for capital improvements. 
  • Renters can use this period to enable credit reporting and increase their credit scores. 

Tax time highlights rent payment seasonality as tenants, presumably replete with cash from their tax returns, pay their rent on time more often.¹ About 60% of annual refunds were sent out by the Internal Revenue Service as of March 31st, 2022, and 56% were sent by the Internal Revenue Service as of April 1st, 2023, according to a RentRedi analysis of government data.² Prior economic research shows that tax refunds and earned income tax credits allow households to smooth consumption and decrease liabilities such as rent and credit card debt.²

We can observe this tax-season economic phenomenon in RentRedi’s payments data. Users with poor-to-fair credit scores tend to increase their on-time payments between February and April compared to the rest of the year. The average on-time payment rate during these months tends to rise between 2.5 and 4.4 percentage points compared to the rest of the year. 

Interestingly, renters with higher credit scores do not exhibit the same seasonal pattern as those in the poor-to-fair credit score bands during tax season. This could be because more affluent renters are less likely to rely on tax season cash infusions to meet their financial obligations.

The impact of tax season on rent payments can benefit both landlords and renters. 

What does this mean for me as a landlord?

1. Between February and April, you can anticipate more timely payments, which can aid in your cash flow management and planning. 
2. This period can also be advantageous for renewing your rental leases, as it is a healthy time for getting security deposits and planning capital expenditures. 

What does this mean for me as a tenant?

Tax season can be a helpful time for you to enable credit reporting to boost your credit scores.

Notes and References

1. Statistics taken from https://www.irs.gov/newsroom/filing-season-statistics-by-year
2. Some studies that discuss the implications of tax refunds for households are:
   1. Lisa Barrow and Leslie McGranahan (2000); 
   2. Shaefer, H.L., Song, X. & Williams Shanks, T.R (2013); and
   3. Ruby Mendenhall, Kathryn Edin, Susan Crowley, Jennifer Sykes, Laura Tach, Katrin Kriz, and Jeffrey R. Kling (2012)

Methodology

RentRedi used credit score entries provided by a tenant to landlords for applications and prequalifications. Sometimes, the tenant entered a score range instead of a singular number for a score. In these cases, RentRedi uses the midpoint of the range as a proxy for the credit score. 

RentRedi then matched each user’s credit scores to their charges. RentRedi categorized each charge into a credit score band based on its lowest matching credit score. The credit score categories match Experian’s categorization. Though this is a more conservative approach, our original analysis was consistent when categorizing charges by averaging credit scores or using the unit’s highest credit score. 

Payment status categories (on-time, late, and unpaid) are from the same methodology used in the Chandan Economics Independent Landlord Rental Performance Report. Critical features of Chandan Economics’ methodology are:

• It only includes rent income charges.
• It only contains charges between $500 and $10,000.
• It removes units that are inactive for more than two months from the sample.

---