Those counting on a hefty tax refund this year might have to scale back their plans.
On Friday, the Internal Revenue Service released early data showing tax refunds are smaller than average so far this year, sparking confusion and outrage from some tax filers.
Why are tax refunds smaller?
The average refund this year to date was $1,865, an 8.4 percent decrease from last year’s average of $2,035. About one in 10 households have filed their taxes so far, down 12 percent from the same period last year, according to IRS data. Processing of refunds has fallen 25 percent over last year.
However, in a tweet, the Treasury stated that, “News reports on reduction in IRS filings & refunds are misleading. Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data.”
Most Americans rely on tax refunds as their biggest financial windfall during the year, using it to build savings or increase spending, says Mark Hamrick, senior economic analyst at Bankrate. The smaller refunds are hurting consumers’ plans to pay off expensive credit card debt or build a savings cushion.
The Tax Cut and Jobs Act passed in December 2017 promised tax cuts for the majority of Americans. Withholdings changed, sometimes leading to larger take-home paychecks. But some consumers experiencing lower returns are blaming the tax reform.
“My tax return is gone. I had to write a check. YOU LIED. You have [sic] my money to the rich for nothing,” one Twitter user replied to Trump in a tweet.
The tax law changes, however, did come with confusion, especially around tax withholding. In January, the IRS announced it will be waiving under-withholding penalties for some taxpayers. The agency acknowledged “some taxpayers could have paid too little tax during the year,” as a result of the changes.
And while the smaller refunds are an unpleasant surprise for some, they were predicted by government agencies. Last year, the United States Government Accountability Office warned the number of filers getting a refund was likely to drop for the 2018 tax year and refunds would be lower in some cases.
Too soon to tell?
It’s still too early in the tax season to tell if returns overall will be lower than past averages. In a statement to the Washington Post, the IRS states the early data only reflects returns processed through Feb. 1, and the recent partial government shutdown caused massive delays in processing early filings.
Should returns continue to trend on the lower side, though, Hamrick says it could hurt both individuals and retailers on an economic level.
This initial concern over lower returns also highlights an alarming reality: most Americans aren’t prioritizing savings. A recent Bankrate survey finds more than 60 percent of Americans are unable to cover a $1,000 emergency with savings.
“Whether it is a shutdown of the federal government, a temporarily paralyzing whether event like a hurricane or blizzard, or something more lasting like loss of a job, we all face the risk of episodes of income interruptions or sudden expenses,” Hamrick says. “The single-best way to prepare and protect oneself is to make emergency savings a priority. The way to do that is to automate savings using direct deposit and to keep the funds in an interest-bearing account.”