Special Feature: Why Tax Refunds Are Down

Dan Pilla

No, it’s not because of tax cuts for the rich.

Democrats are up in arms over a recent Treasury Department report showing that tax refunds are down thus far in 2019 compared to last year. The report indicates that of the 27 million tax returns filed through February 8, the average refund is down about 9%.

Quite predictably, Dems—with the reliable help of the media—blame President Trump’s Tax Cuts and Jobs Act, which took effect on January 1, 2018. The Dems claim that the report is proof that the Jobs Act was nothing but tax cuts for the rich. The fact that lower refunds has been twisted into a claim that the middle class pays higher taxes because of the Jobs Act is proof that the Left has no regard for truth when it comes to tax policy.

It is also proof that the typical person has no idea what they actually pay in taxes.

First of all, a tax refund, by itself, is no measure whatsoever of whether your tax liability went up or down. The refund is simply a measure of what you overpaid. In my work as a tax litigator, I regularly ask people what they paid in taxes the previous year. The answer I typically hear is, “I didn’t pay anything. I got a refund.”

But when I examine that person’s Form W-2, Wage and Tax Statement or the tax return itself, I find that they paid thousands in taxes through wage withholding and received only a fraction of that back in a refund. Thus, they did in fact pay taxes but had no idea how much. That’s one of the key problems with our current tax system. Taxes, especially social security taxes, are hidden, and people just don’t know what their tax burden actually is.

The fact that refunds are lower this year is not necessarily a bad thing. You do not get a refund because government got religion and decided to do you a favor and send you free money. You get a refund only because you paid in too much to begin with. If your refund is down, that likely means you didn’t overpay as much as last year. And that’s a good thing.

The big reason the typical person probably paid in less in 2018 than in prior years is the fact that on January 1, 2018, the IRS adjusted the withholding tables in light of the changes made by the Jobs Act. Given that about 80% of Americans will see a tax cut (not an increase) for 2018, the IRS adjusted the tables so that employers would take less money out of the paychecks of their workers. But even at that, the data that is causing the alarm bells shows that the typical refund is down by just 9%, to about $2,730. The average refund was about $3,000. Due to the adjustment in the withholding tables, people got the remaining $270 in their paychecks every month. Your refund is smaller because the government didn’t have as much of your money to begin with.

About 75% of all tax filers get a refund every year. It happens for two reasons. First, people have no idea how to properly adjust their withholding so they don’t overpay in the first place—which means they overpay. Second, they treat the withholding system as some kind of savings account. Either way, it’s the world’s worst way to manage your money.

For one thing, the IRS doesn’t pay you a nickel’s worth of interest on your money when you overpay. For another thing, you can’t get your own money back until you file your tax return, and by the time you do that, you are three or four months into another pattern of over-withholding for the next year. As such, the IRS always has more of your money than you really owe.

When you manage your tax payments properly, you have the money in your hands, where it belongs. That money is available for you to use and enjoy in a manner that best suits you and your family. That way, you can save or invest in real wealth-building vehicles, or pay down debt, or fund business needs, or just pay for fun and recreation. In any event, you—not the government—is in charge of your own money.

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