Refunds are up by less than predicted

Average received back from IRS was $2,063 at the end of April

May 11, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Taxpayers on average received refunds this spring that were about 5 percent higher than a year ago - far short of the double-digit percentage increases that some forecasters had predicted.

The average tax refund as of the end of April was $2,063, up $98 from the year before, the Internal Revenue Service reported yesterday. As of last week, Uncle Sam had returned $180.1 billion to the nation's taxpayers.

That's about $21 billion more than at the same time a year ago, but billions below the $37 billion increase that the Treasury Department predicted for the season, said Richard DeKaser, chief economist with National City Corp. in Cleveland. Still, the refunds should result in a meaningful bump in consumer spending, he said.

Some forecasters had projected that refunds would be 20 percent higher this year because of last year's tax cuts, which reduced rates on ordinary income as well as on dividends and long-term capital gains.

TaxBrain, an online tax service, predicted in November that the average refund for 2003 would be $2,552, a 29 percent increase over the prior year. And the Treasury Department in February said the average tax refund this spring would be $300 higher than if last year's tax cuts hadn't been adopted.

What happened?

Economists and tax experts point to a variety of reasons why refunds came under expectations.

One likely culprit is the alternative minimum tax, economists said.

The AMT, a parallel tax system, was created decades ago to ensure that the rich paid taxes. Filers pay either regular income tax or the AMT, whichever provides the most money for Uncle Sam.

But because the AMT was never adjusted for inflation, more middle-income families are ending up paying it.

And, while regular income tax rates were lowered last year, the AMT's rates stayed the same, increasing the number of taxpayers who ended up owing the AMT.

"Fundamentally, the size of the tax cut wasn't as big as we thought it was" because of AMT, said David Wyss, chief economist with Standard & Poor's in New York.

Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis, said many workers saw an increase in income as the economy picked up last year. Their tax withholdings might not have been enough to cover their bigger tax burden, so their refunds were lower, he said.

Eric Hayes, a senior tax analyst with TaxBrain, said his refund projections included the $400 increase in the child tax credit, which was refunded in advance to millions of filers last summer.

He added that there are still millions of tax returns outstanding, and once they are factored in, the average refund amount will get a boost.

Some said the projections were just far too rosy.

"The truth is a 25 percent increase is a pretty big increase, and while some of the tax cuts were pretty substantial, especially for people with capital gains and dividend income, that's not the vast majority," said James A. Seidel, director of federal taxes at RIA, a New York tax information company.

Even if refunds were lower than expectations, filers whose incomes went up benefited even more because of lower rates, said Tara Bradshaw, a Treasury spokeswoman.

"Any way you slice it, taxpayers did better after the 2003 tax cuts," she said.

In other tax filing news, the IRS said yesterday that a record 60 million returns were filed electronically, a 15.4 percent increase over last year. Of those, more than 14 million returns were self-prepared and filed using a home computer, a 22 percent increase over last year.

This was the second season of Free File, a partnership between the IRS and private tax preparers to provide free online filing. This year, Free File was used by 3.4 million taxpayers, a 22 percent increase over last year.

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