Personal Finance

Tax Refunds Are Coming In Higher, but Fewer Filers Are Getting Them

Man at laptop holding his head and sporting look of shock

Data from February 2019 revealed that tax refunds were coming in lower across the board than in years past. But the IRS now reports that refund numbers are growing. As of the end of February, the average refund was $3,143. That's a 1.3% increase from the same time last year. The number of filers receiving refunds, however, continues to drop. In fact, the number of issued refunds has decreased by 4.8% from last year. As such, many filers are still in an unhappy place -- not to mention a financially precarious one.

Tax code changes lead to fewer refunds

Why the decline in refunds? Much of the trend can be linked to the major tax code overhaul that took effect in 2018, which lowered almost all individual tax brackets. In conjunction, the IRS released new withholding tables that determined how much tax employers were to withhold from employee earnings. The result? Many workers saw their paychecks go up, even if they didn't get a raise. As such, the money many Americans are expecting in the form of a refund has, in fact, already been paid to them.

Man at laptop holding his head and sporting look of shock


Furthermore, workers who saw a big boost in their take-home pay without a salary increase might find themselves in a scenario where they owe the IRS money for the first time in a long time. This especially holds true for those who earned side income, whether from investments or a job, but didn't pay estimated taxes on those earnings along the way.

An overreliance on refunds

Though taxpayers are wired to regard IRS refunds as a positive thing, in reality, they represent nothing more than an interest-free loan to the government. In fact, many workers who get a lump sum back from the IRS during tax season can't afford to go without that money during the year -- yet they continue overpaying their taxes to avoid owing money.

Getting slapped with a tax bill is a valid concern, especially given that 58% of Americans have less than $1,000 in savings . But banking on a huge windfall from the IRS is a bad idea -- especially in light of the recent tax code changes that might, indeed, cause filers who have historically gotten refunds to not see a dime this year.

A better solution, therefore, is to stop counting on refunds and instead do a better job of saving and tax-planning. All workers should, ideally, have an emergency fund with three to six months' worth of living expenses at the ready. Many don't, however, and instead bank on their tax refunds to take care of essentials like auto repairs or health matters. This year, therefore, might serve as a wakeup call that workers need to break the paycheck-to-paycheck cycle and start managing their income more responsibly.

As for those folks who don't get a refund this year, it might help to remember that by underpaying taxes during the year, they were the ones who benefited from an advance on their earnings. The reality is that owing the IRS a small amount of money during tax season isn't a terrible thing at all, since the goal in paying taxes should actually be to break even, or come as close as possible.

Those who are used to a massive windfall each April will need to rethink their strategies, and perhaps adjust their withholding if they underpaid taxes to the point of being penalized for it. Otherwise, working Americans' best bet is to set aside funds consistently so they're not counting on tax refunds, and aim to collect as much of their earnings up front as they're actually entitled to.

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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.

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