Tax reform took effect in early 2018, and this tax season has been the first chance for Americans to see what impact the new legislation would have on their tax returns. Despite lower tax rates and promises of lower overall taxes, early returns made many people scared that tax refunds might come in lower than expected. That had many people in a panic, citing concerns about withholding practices and leaving many to feel as if lawmakers had misled them about the impact of reform.
As tax season has progressed, though, the numbers on the refund front have looked better. Now, tax refunds have not only jumped back to more attractive levels but have also eclipsed the typical amount from last year -- and that has many more hopeful about their prospects to get money back from the IRS.
Typical refunds top $3,000
The volatility in the IRS numbers about refunds so far this tax season shows just how hard it is to come to reasonable conclusions based on an incomplete set of data. As recently as Feb. 8, the average tax refund was below $2,000, raising big worries about whether tax reform would be a bust.
At the time, though, the Treasury Department reassured taxpayers that the panic about shrinking tax refunds was overblown. Noting that the early numbers were "based on a small initial sample from only a few days of data," the message from Treasury was that things would get better in time. Analysis from private economists confirmed that assessment, predicting a healthy upswing in the immediate future.
Those reassurances have borne themselves out in the IRS release as of Feb. 22. Key numbers from that report include the following:
- The number of returns received has climbed to nearly 50 million, with 47.7 million returns processed.
- The IRS has issued 38.6 million refunds, down about 5% from year-ago levels.
- The total amount of refunds issued is at $121.2 billion, lower by 4% from the amount the government had paid back to taxpayers as of the same time in 2018.
- The average tax refund has climbed to $3,143. That number's up 1.3% from the $3,103 average this time last year.
A similar story comes out from looking specifically at returns calling for direct deposit of refunds. Taxpayers have seen an average of $3,226 deposited into their bank accounts from the Treasury as their tax refund, up from $3,199 this time a year ago.
What's happening with refunds?
The latest numbers on refunds might seem too good to be true to some skeptical taxpayers. Yet the pattern that we've seen with refunds during the current tax season is consistent with trends from past years. Readings in early February have been on the low side for the past several years, but by the end February, they've always turned back upward.
One key reason for that pattern is legislation passed within the past few years that forced the IRS to delay paying refunds to taxpayers claiming certain popular tax breaks. Those who receive the earned income tax credit or who receive the refundable portion of the child tax credit can't get refunds until later in February. That prevents them from showing up in the early February data, but they then pour in late in the month. Because those credits can be large -- more than $6,500 for the earned income credit and $1,400 per child in refundable child tax credits -- they can dramatically boost the average refund size when they start coming in.
The important thing about your taxes
All the attention that tax refunds have gotten this season obscure what's actually the most important takeaway about the issue: It's the total amount you pay in taxes that matters, not the size of your refund. Many people use tax withholding as a way of forced saving, getting their own money back at the end of the year as a big lump sum they can use for big-ticket purchases, paying down debt, or investing. But you'd be just as well off taking that extra money throughout the year in the form of bigger paychecks, leaving yourself with a smaller refund at the end of the year.
Nevertheless, even if the average refund ends up rising this year compared to past tax seasons, there will still be winners and losers from tax reform, and some will end up paying more tax than in previous years. That'll keep tax reform controversial through the coming months, but in the meantime, you can expect further fluctuations in the IRS figures as more people file their returns and get refunds back.