Personal Finance

Is the Tax Refund Controversy Overblown?

Tax return forms and a pencil on top of a spread-out pile of money.

Millions of taxpayers have looked forward to this tax season to see whether they'll save on their taxes. With new tax laws having taken effect at the beginning of 2018, this is the first chance Americans will have to see what impact tax reform had on their own finances.

There's been a lot of controversy recently about the size of tax refunds that taxpayers have received so far this year. Many have seen smaller refunds than they anticipated, and some have even had to pay taxes instead of getting a refund check. Yet others are arguing that the early numbers on tax refunds are misleading and that things will get better as tax season progresses.

Tax return forms and a pencil on top of a spread-out pile of money.

Image source: Getty Images.

The Treasury fights back

Taxpayers' concerns initially stemmed from the official statistics from the Internal Revenue Service talking about the way the early part of tax season was playing out. According to the numbers as of Feb. 8, the average tax refund had fallen to $1,865, down $170 from year-ago levels. Moreover, the number of tax refunds issued had fallen by about a quarter compared to the same time last year.

That news led to a number o f report s featuring anecdotes from individual taxpayers who had seen particularly dramatic swings in their taxes from 2017 to 2018. Many stories featured people who'd gotten refunds in 2017 but who suddenly owed money on their 2018 returns.

The Treasury Department quickly responded to these reports, saying in a tweet that "reports on reduction in IRS filings [and] 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."

A little help from analysts

In addition, Morgan Stanley (NYSE: MS) stepped in to do some research of its own. It found that more recent information shows that refunds are now tracking higher than they were this time last year. In doing its research, Morgan Stanley is apparently going beyond the IRS-provided data, because no further releases from the tax agency have come out since Feb. 8.

Morgan Stanley's position is consistent with assertions it's made throughout the course of the past year. Last June, the Wall Street company said refunds could jump by $62 billion this tax season. That works out to more than a 25% increase in total refund amounts, and Morgan Stanley said at the time that taxpayers were having too much money withheld from their paychecks, causing the higher refunds.

Cause for hope

Some will take the Treasury Department's assertions as simply a knee-jerk answer to what's becoming a highly politicized issue. But some of those claims bear out in past data.

For instance, in 2018, the earliest IRS read on refunds showed average refunds of $2,035. By early March, the average had jumped to $3,046. The numbers settled back down slightly by the first week of April, but the $2,864 average refund was still well above what many had feared given the initial readings. The final reading of $2,899 late in 2018 showed that optimism about the eventual track of those figures was justified.

The same trends appeared in 2017. The early February read on average refunds came in at just $1,994. Just a month later, the numbers had climbed to $3,016. The average refund dropped to $2,851 by early April, but once again, total refunds ended up significantly higher than initial readings had suggested. Eventually, the average refund finished out at $2,888.

What to do about your refund

For most people, the average refund across tens of millions of tax returns doesn't matter if your own personal experience turns out to be different. The big question is whether your own personal tax situation got changed dramatically as a result of the tax law changes. Those most likely to be adversely affected include those who:

  • Pay enough in state and local taxes that they suffered from the $10,000 limitation on deducting such taxes.
  • Had large families who were eligible for personal exemptions but aren't eligible for the new, higher child tax credit.
  • Took big deductions under eliminated tax breaks, such as unreimbursed employee expenses.

If your refund shrank and you want it back, you can do so by adjusting your withholding from your paycheck. By filing a new Form W-4 with your employer, you can have more money taken out of your pay, leaving you with a larger refund at year-end.

It's likely that the current low levels of refunds will rise over time as tax season goes forward. But it's still an open question whether those average refund numbers will eventually exceed what taxpayers got back in past years. As the IRS releases further information, you'll want to see whether the same trends from previous tax seasons once again bear out -- and whether the eventual answer is what Americans have hoped to see .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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