Be Careful Being Misled by Recent Tax Season Reporting

In recent weeks, there have been several negative news reports released about the current tax season. Specifically, the underwhelming tax refunds that Americans are receiving. We wanted to offer some thoughts on the recent “tax” anger and show a useful table from Strategas Research Partners that illustrates the overall tax benefit to Americans in 2019. As seen in the table, this year, the net tax cut will be the largest of the years between 2018 and 2020 amounting to over $200 billion.

While the season is highly fluid and complex, we outlined some reasons why tax refunds may disappoint but also mislead Americans as to the total benefit of the tax reform package.

  • Shutdown disruption: Tax season just began on January 28, 2019. It is important to remember that the government hires outside contractors to assist with tax filings. With the shutdown ending on January 25, this could be a factor with tax returns that are processed dropping 10% from the same time last year.
  • Getting more upfront: Tax refunds are down 23% from the same time period in 2018. However, Americans are receiving more in their paychecks as opposed to giving the government money upfront (resulting in a refund). The income tax cut, the increase in standard deduction, higher child tax credit and lesser amount of people hit with AMT surpass the increase from the deduction reform (i.e. SALT).
  • Capital gains: Some Americans were also hit with capital gains and distributions from mutual funds that they may not be accustomed to. According to data by ICI, 2018 mutual fund capital gains and dividend distributions were likely to surpass the record high seen in 2017.
  • Catch identity theft: Due to the surge in identity theft using the tax filing system (criminals file quickly at the beginning of tax season), the IRS has put extra monitors in place to protect tax payers. For example, tax returns with certain credits (e.g. EITC) are being delayed until February 15 to see if two tax returns are filed. *

We will continue to monitor the data released but at this time believe there are exogenous nuances impacting tax season this year. To look at it with a glass half full approach, maybe Americans aren’t rushing to file their taxes because they don’t need the refund as much as prior years with the strong labor market, wages rising and net worth near a record high?Footnotes: Data as of February 12, 2019. *According to the College Investor as of January 23, 2019.
Source: Strategas Research Parners, IRS, Investors Business Daily.