Money

Tax refunds now down 8.7% but experts say it's still too early to tell if this is the new normal

Twenty20

Two weeks into the 2019 tax season, people filing their taxes are still getting back less money than they have in the past.

Refunds dropped 8.7 percent over the first two weeks of filing season, the Internal Revenue Service reports. The average refund this year so far has been $1,949, compared with $2,135 during the same two-week period a year ago.

Meanwhile, direct deposit refunds, which the IRS touts as a faster way to get your money because it allows the agency to send it straight to your bank account, are down almost 10 percent from a year ago.

Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center, tells CNBC Make It that people should not read too much into these early numbers.

"It really isn't a bellwether — we just have very early information," he says. "There's a lot of missing data here."

It will likely take another month of these kind of numbers, maybe even more than that, Gleckman says, to really determine if the lower average refunds are the new normal.

"It's going to take a while before we can make any serious judgement on what's going on," he says.

Why refunds may be different this year

Many people are watching this tax season more closely than usual because it's the first time the Tax Cuts and Jobs Act is in effect for a full tax year.

The new law, passed in December 2017, made some broad changes: It introduced new tax brackets, included an expanded child care credit and changed the way itemized deductions are factored in, for example. Unfortunately, 28 percent of Americans don't understand exactly what's different, and almost half have no idea how the changes affect their tax bracket.

"The law is so different, we may have a different pattern than in the past," Gleckman says. "This is not a normal year."

Adding to the confusion is the fact that the IRS is processing returns more slowly, in large part because of the 35-day partial government shutdown.

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Here's how you can maximize your tax refund

Those most likely to be most affected by the tax changes are people who did not adjust their W-4, the form that calculates how much income tax is withheld from every paycheck. An estimated 20 percent of taxpayers did not withhold enough throughout the year, says Barry Kleiman, a CPA and principal at the tax firm Untracht Early.

"The changes in the Tax Cuts and Jobs Act really are going to surprise people, and they're going to surprise some people on the upside and some people on the downside," Gleckman says.

The withholding tables were adjusted to reflect the lower tax rates, Kleiman says. But these changes did not take into account other tax law updates such as the reduction in itemized deductions.

End result: "Taxpayers received more in their paychecks but could now see smaller refunds or monies due," Kleiman says.

What you should do now to prepare

Because of the general confusion and the sluggish refund rate, tax experts say you shouldn't assume you're getting a big refund this year.

That's easier said than done, though, especially because many Americans earmark their refunds for big purchases. For some, it goes toward necessary purchases like a car or more discretionary spending like a summer vacation, while for others, that money pays for crucial medical expenses they've been putting off.

Unfortunately, a mental shift may be necessary: "Taxpayers should definitely adjust their expectations when it comes to their tax refunds this filing season," says Logan Allec, a CPA and owner of the personal finance blog Money Done Right.

Unless you've actually run the numbers beforehand — this is, you've taken the step to compare how much you expect your total tax liability for the year to be versus how much you've paid in through withholding and other payments — Allec says, "it's almost a fool's errand to 'expect' to receive some certain refund amount, or to even receive a refund at all."

In fact, Allec says, "when it comes to refunds, it's not really a good idea to count on them as part of your budget, especially when it comes to large purchases or trips."

Taxpayers should definitely adjust their expectations when it comes to their tax refunds this filing season.
Logan Allec
CPA

Experts also agree you should still file your taxes as soon as possible.

Tax filing season, which started on January 28, 2019, runs through Monday, April 15, 2019, for most taxpayers. So you can file ASAP, and that's what they recommend: "It's still a benefit to file early," Gleckman says.

It's also not a bad idea to consider the worst-case scenario, one in which you have to write an unexpected check to the IRS, Allec says. Take a close look at your budget now to start looking for ways to save money where you can.

"I'm not saying that people necessarily need to alter their entire lifestyle," Allec says. Start with the easy stuff: dine in more, or rent a free movie from the library rather than going out.

If you do end up owing the IRS, don't panic. There are payment plans available if you can't pay your entire tax bill when you file your return. And the IRS has said it may waive penalties if you've paid at least 85 percent of your 2018 tax liability.

Keep in mind that filing an extension will not get you a reprieve. An extension does not extend your time to pay your taxes due, says New York-based CPA Anil Melwani. Instead, you'll still have to pay about 90 percent of your tax bill by April 15 to safely avoid penalties.

"The tax authorities have no problem giving anyone until Oct. 15 to file their returns, but they do not want to wait that long to receive 'their' money," he says. "This is definitely one of the most confusing things when it comes to income taxes."

Don't miss: Here's who is more likely to get a lower refund this tax season, according to experts

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