Each year, millions of tax filers eagerly await money back from the IRS. The majority of filers, in fact, walk away with refunds during tax season, and in recent years, the average refund has been rather substantial.
But if you're anticipating the usual windfall this year, you might want to adjust your expectations. So far, the average tax refund is coming in at $1,865, which represents an 8.4% drop from the $2,035 the IRS was dishing out to taxpayers the same time last year. Not only that, but the number of refunds issued declined by 24.3%. If you're expecting money back from the IRS, know that the sum you receive might be lower than usual -- and prepare accordingly.
Why refunds are lower this year
The tax code went through a major overhaul that took effect in 2018, and one of the most significant changes that ensued was a lowering of almost all individual tax brackets. The goal in doing this was to give workers more of their hard-earned money, but to accommodate that change, the IRS issued new withholding tables for employers to follow. Those tables dictated how much tax companies were required to hold back from their employees' earnings, and for the most part, workers saw their paychecks go up, even in situations in which there was no raise at play.
The result? The money that many Americans would normally receive in the form of a tax refund was instead paid to them during the year. So it stands to reason that refunds are lower this tax season than in previous years.
Not only that, but some filers who historically have received refunds might end up owing the IRS money for the 2018 tax year. This might come into play for those who got substantial pay increases or earned a lot of side income during the year (whether from extra work or investments) and didn't pay estimated taxes on it.
Either way, know this: If your paychecks got a lot bigger last year, there's a good chance your refund won't be as substantial. Before you make plans to spend that money, take a stab at your taxes and see how much cash is actually coming your way. At the same time, recognize that getting a lower refund isn't actually a bad thing -- provided you prepare for it.
You don't want a large refund anyway
Many taxpayers are quick to liken their refunds to free money, but that's not what refunds represent. When you get a refund, it's because you overpaid your taxes during the year and lent that money to the government for nothing in return.
Here's another way to look at it: Let's say you typically get a $2,400 refund from the IRS each April. The reality is that you should've gotten an extra $200 a month in your paychecks over the past year, only instead of doing that, you let the government keep that money and return it to you after the fact.
If you're in a strong place financially, getting a sizable refund isn't the worst thing in the world. But if you're among the millions of Americans living paycheck to paycheck, it's a problem, because chances are, had you gotten access to that money sooner, it would've helped you avoid charging some expenses on a credit card and racking up debt in the process.
And that's why smaller refunds are actually a good thing -- if you get one, it means you didn't overpay your taxes quite as much as you did in years past. In fact, your goal in paying taxes should generally be to break even when you file your return so that you owe the IRS little to nothing and it owes you little to nothing. Once you adopt that mindset and stop banking on those refunds, you'll be better positioned to make the most of your money as you collect it.
File sooner rather than later this year
While the average tax refund so far has dropped by about $170 from the previous year, your refund might come in even lower -- or you might not get one at all. That's why it's crucial to get moving on your taxes and figure out where you stand. If you're expecting a $2,000 refund that ends up being a mere $700, the sooner you're aware, the sooner you can plan around it. Similarly, if you end up owing the IRS money this year, filing early will give you more time to figure out how you'll come up with that money and avoid the penalties associated with paying your taxes late.