American Taxpayers Most Concerned with Tax Refunds, But Don’t Understand Them

person calculating their taxes with a calculator

Americans aren’t well-versed in taxes, and it seems many are still unsure about the size of their tax refund.

Headlines during the 2019 tax filing season focused their attention on the change in American tax refunds following the Tax Cuts and Jobs Act (TCJA), the largest overhaul of the tax code in 30 years. 

The change was devastating for some since 27 percent planned to use their returns to pay off debt, store it in savings and apply it to other expenses. Since tax refund outcomes impact so many American budgets, we took a closer look at how the TCJA changed things for everyday Americans. 

We surveyed a total of 2,000 Americans to see how things have changed for them between the 2018 and 2019 tax filing seasons and what their expectations are for 2020’s tax season. We found that many Americans experienced changes in their 2019 tax refund and still expect fluctuations this year. 

Key Takeaways:

  • Last year: 14 percent received a tax refund that was lower than normal.
  • This year: 11 percent expect to receive a refund lower than 2019’s refund.

Last Year’s Tax Refunds Shook Things Up for Some Americans

We found that 14 percent of Americans received a tax refund lower than they normally would, seven percent received a higher refund and about nine percent owed money when they don’t normally owe.

Looking at all answers, nearly 45 percent of respondents experienced some sort of change in their tax refund outcome.

It’s likely that anyone who was surprised by their tax refund didn’t see how the TCJA affected them. In some instances, taxpayers did not adjust their withholdings and unintentionally kept more in their paycheck every month. 

This would have resulted in a smaller tax refund at the end of the year or in owing taxes if too much was withheld. This is just one example of how the TCJA changes impacted American taxpayers.

Howard Gleckman is a Senior Fellow at the Urban Brookings Tax Policy Center (TPC) and spoke to CNBC in early 2019 about the tax refund confusion.

He said Americans should see if their taxes went up or down rather than if their tax refund fluctuated. Gleckman says this is a more accurate way to see how you were affected since refunds are only given out if you pay too much in taxes throughout the year.

the average tax refund went down two percent between 2018 and 2019
Source: IRS 2019 Filing Season Statistics

Overall, the average tax refund between 2018 and 2019 went down by two percent, according to the IRS’ 2019 filing season statistics. Although the average is low, the effect on individual taxpayers greatly varies.

Why Americans Weren’t Prepared for the TCJA

Many Americans were unfamiliar with taxes and tax laws prior to the changes brought about by the TCJA and were largely unprepared.

Betterment’s Consumer Perspectives Report: Tax Season from 2019 shed some light on the average American’s tax knowledge. Nearly a quarter of respondents did not know that April 15 was the annual tax filing deadline and half didn’t know how much was withheld in taxes from their paycheck.

An H&R Block study on the effect of the TCJA in April 2019 found that 80 percent of Americans did not update their W-4 in 2018. A Gallup poll in April 2019 found that 43 percent of Americans were unsure whether the new tax law affected what they paid in federal income taxes.

The Pew Research Center also found in April 2019 that a third of Americans understood the TCJA’s impact “not too well” or “not at all well.”

Given that many Americans weren’t well-versed in taxes and tax law prior to the TCJA, it’s not surprising that many were caught off guard last year. Since many news outlets covered this story last tax season, more Americans are hopefully aware of the change and have looked into how the TCJA will affect them while it’s still in place.

a third of americans don't fully understand the tax cuts and jobs acts
Source: The Pew Research Center

Many Americans Still Expect to Receive a Tax Refund This Year

Our survey revealed that about 11 percent of Americans expect to receive a lower refund than last year. We also found that 10 percent expect to receive a refund higher than 2019’s refund and about four percent expect to owe more than they did in 2019.

About 30 percent expect their tax refund outcome to have some sort of change from last year.

About half of Americans expect to receive some sort of tax refund this year. Compared to last year, the number of Americans who expect a lower tax refund dropped by about 3 percent. 

Tax Refunds Still Remain a Key Part of Some American Budgets

Despite the events of last year, many Americans still look to tax refunds as an integral part of their financial plans.

The financial company Self found in December 2019 that one-third of Americans are “very dependent” on their tax refunds. 44 percent said that owing the IRS this year would derail their 2020 budget. On the other hand, 52 percent are currently waiting to file because they know they’re going to owe money.

An early 2019 NPR report said many people are only focused on the amount of their tax refunds. The report quotes Richard Thaler, winner of the 2017 Nobel Prize in Economic Sciences, saying that the slight increase in paychecks during 2019 went unnoticed.

He goes on to explain that people like tax refunds and use it as a de facto savings plan since many have trouble saving throughout the year.

Keep an Eye on Your Debt If You’re Relying on Your Tax Refund

Your tax refund may fluctuate this year, especially if you still haven’t adjusted your W-4 and reviewed how the TCJA may have impacted you. H&R Block’s TCJA study noted that a person who saw a drop in their refund in 2019 could see a bigger drop in 2020 if they haven’t updated their W-4.

This can derail budgeting plans if you were relying on your refund to pay down debt. Pay close attention when filing this year and be prepared to readjust your plans so you aren’t caught off guard. If possible, come up with a backup payment plan to ensure you stay on top of payments.

It’s crucial to keep an eye on your debt since on-time payments and the amount of debt you owe are the two highest factors that impact your credit score. A lower credit score can hurt your chances of securing a mortgage at an ideal rate, qualifying for a refinance and even getting a rental application approved. Learn more about how debt and other factors impact your credit score.

Methodology

This study was conducted for Lexington Law using Google Consumer Surveys. The sample consisted of no less than 1,000 completed responses per question. Post-stratification weighting has been applied to ensure an accurate and reliable representation of the total population. This survey was conducted in January 2020.