Democrats looking to score points against President Donald Trump this week focused attention on data from the government that showed refund checks going out to early filers were smaller than they were a year ago.
Sen. Kamala Harris (D-CA) falsely claimed that smaller refunds indicated that the tax cuts amounted to a “middle-class tax hike.”
The smaller refund checks, however, were not indicators that taxes have gone up. In fact, two-thirds of American households got a tax cut this year. For middle-class families with children, over 80 percent got tax cuts.
A smaller refund check merely indicates that early tax-filers overpaid their taxes by a smaller amount throughout the year. In other words, taxpayers kept more of the money they earned — that is, money they did not owe to the federal government.
Tax filing season kicked off on January 28, marking the first time taxpayers were filing their returns under the Tax Cuts and Jobs Act. The first refund checks went out last week, and data from the Internal Revenue Service (IRS) showed the average refund had declined 8.4 percent, to $1,865, for the week ending February 1.
A large refund check might seem like a bonus to some taxpayers but it is merely a sign that taxes were overpaid during the year. Essentially, a taxpayer who gets a large refund gave an interest-free loan to the government. That money would have been better used if it had gone toward paying down bills or had been saved in a bank account that paid interest.
Donald Trump Jr. pointed this out in a reply to Harris on Tuesday.
A tax cut is a reduction in what people owe the government for the year, compared to what they would have owed on the same income in the prior year. Thanks to a larger child tax credit for 2018, families with children will pay much less in taxes and many more will owe nothing at all.
A family with an expected zero-tax liability, however, would also likely receive no refund if it perfectly estimated its taxes; although, about two-thirds of households do overpay and receive refund checks. This is especially true immediately following tax cuts because many taxpayers do not reduce their withholding enough to fully account for the cut. On average, refunds will be larger this year than last year, according to estimates by the U.S. Treasury.
But because the Trump administration was eager to deliver the benefits of the tax cuts, the IRS changed its default settings for calculating how much was withheld from each paycheck. As a result, many households have already received their tax cuts and will not see them in the form of larger refund checks.
The administration has said it expects refunds for most households to be about the same as last year or even higher. In fact, it set the withholding rules with an eye toward keeping refunds steady.
Some taxpayers filing early were no doubt surprised that they got smaller refunds. But politicians claiming this means their taxes were hiked are not describing reality.