Tax Refund Average Increases 12%
The average federal income tax refund has grown 12% so far this year to $2,091, the Internal Revenue Service said Thursday. But tax experts say the reasons behind the increase over last year aren’t all positive.
Investment losses, job losses, pay cuts and declining returns on money deposited in banks or money market funds left millions of taxpayers with less taxable income last year.
That means a bigger chunk of their withholding is being returned in the form of refunds--$74 billion as of March 1.
But the increase in the size of refund checks also is due to last summer’s tax law, which raised tax credits for families with dependent children.
An increase in charitable contributions also may be playing a role.
Economists said money from tax refunds tends to stimulate the economy because it’s often spent on consumer goods.
But they cautioned that the effect may be muted this year because of the reasons behind the increase.
“In the abstract, tax refunds are stimulative to the economy,” said Gary Schlossberg, senior economist with Wells Capital Management in San Francisco. “You are putting more cash in peoples’ hands, so their purchasing power goes up.”
But for the roughly 1.8 million Americans who lost their jobs last year, or the countless others who simply earned less, a higher refund is less likely to get spent at the mall, Schlossberg said.
Capital losses claimed by victims of last year’s stock market swoon played a particularly big role in buoying tax refunds this year, experts said.
“Well over half of my clients have investment losses in their portfolios this year,” said Philip J. Holthouse, partner with Los Angeles tax law and accounting firm Holthouse Carlin & Van Trigt. “While in 1999 and 2000, these guys had difficulty finding losses to offset their gains, this year it was easy to find losses--too easy.”
The rise in charitable contributions that followed the Sept. 11 terrorist attacks also may be contributing to higher refunds, Holthouse said, because charitable donations can reduce a person’s taxable income.
The increase in the child tax credit by $100 a child also has helped boost refunds for many middle-income taxpayers, he said. (High-income taxpayers can’t claim the credit because it phases out above set income levels.)
Last year’s tax law also lowered income tax rates for most workers. But the rate cuts largely were passed on through rebate checks mailed out last year and lower tax withholding during 2001, according to the American Payroll Assn. in Washington.
The average refund amount is likely to decline as the filing season progresses because taxpayers who expect to get the most money back typically file the earliest. Those who owe money or expect small refunds tend to file at the last minute.
At this point in last year’s filing season, refund checks were averaging $1,872. But the average fell to $1,743 by the time all the refunds were calculated.
Federal tax refunds have been rising steadily for a decade, and that’s a source of concern for tax experts and the IRS.
“The reason people are getting these refunds is because they paid too much tax through withholding during the year,” said Rita Ziedner, a spokeswoman for the American Payroll Assn. “It’s a shame that so many taxpayers are giving Uncle Sam an interest-free loan. They would be much better served to put this money in their own interest-bearing accounts.”
Taxpayers should try to do better next year, said Suzzanne Brubaker, a director at Deloitte & Touche in Los Angeles.
“It is giving us a good opportunity to encourage clients to look at their overall financial plan,” she said. “We are encouraging our clients to do some good projections for 2002 to get their withholding at the right level.”
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