Tax refunds are up 17%

But many people are cautious about spending the money

March 18, 2002|By BLOOMBERG NEWS

ATLANTA - Brad Davis is getting $1,850 back from the Internal Revenue Service, more than double his refund from the prior year. While computers, TVs and appliances may be had with that amount, Davis isn't buying.

"I'm just going to sit on it," said the 35-year-old Atlanta resident. Davis lost his job in January as a sales representative for a maker of commercial skin-care products. The refund and severance are enough to tide him through May, he said.

Refunds are up 17 percent, or $74 billion, so far this year as Americans submit income tax forms showing households paid more in advance than they owed.

Legislation signed in June by President Bush cut tax burdens, entitling some payers to more than the advance refunds, or "rebates," of $300 to $600 distributed last year. The added money may provide a cushion rather than a spur to an economy climbing out of recession.

"Most of the tax rebate last year wasn't spent, but enough was to keep the economy going," said Christopher Low, chief economist at First Tennessee Capital Markets in New York. "We're seeing the same thing this year."

One reason is that the number of unemployed workers climbed to 7.9 million last month from 5.9 million in February 2001, just before the record decade of expansion came to a halt. Investors also claimed stock market losses.

A reduction in the amount of tax withheld from paychecks starting Jan. 1 contributed to a 1.6 percent rise in January in disposable personal income, the largest monthly gain since August. The legislation had created a new 10 percent tax bracket, as opposed to 15 percent, retroactive to Jan. 1, 2001.

"This gives a boost to people who are forced by economic conditions to spend everything they make anyway," Low said.

Internal Revenue Service statistics from 1999, the most recent available, show about one-fourth of the 127 million tax returns filed that year reported no taxable income, as individuals sought a tax credit or a refund of taxes withheld from paychecks. More than 8 percent reported taxable income of $12,000 or less.

As of March 1, individual refunds averaged $2,091. That's up 12 percent from $1,872 in 2001.

Capital losses may also have played a role in boosting refunds, said Gary Schloss- berg, an economist at Wells Capital Management in San Francisco. The Nasdaq composite index lost more than half its value between the end of 1999 and end of last year.

David Stocker, 56, is banking his refund, his first in 37 years. The minister and his wife are getting back about $1,000, he said.

"The tax break last year was a real treat," Stocker said. The couple will increase their Roth IRA contributions, taking advantage of a limit that grew to $3,000 per person from $2,000.

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