Taxpayers get record refunds from IRS

WASHINGTON -- Americans got nearly $150 billion in income tax refunds this spring, a record $1,937 on average. Tax cuts and the nation's sour economy were two of the biggest reasons.

The Internal Revenue Service announced Thursday that the 77 million refunds processed through April 19 also set a record. The same was true for the 36.5 million refunds that taxpayers had deposited directly into their bank accounts.

The tax cut signed into law last year by President Bush had a lot to do with refunds that averaged $1,937, an increase of 13 percent from the previous year. Tax rates were reduced across the board and middle-class taxpayers got a $100 boost in the child tax credit.

"What you see in the new statistics from the IRS is, in part, the $57 billion in tax relief for 2001 that resulted from that historic tax cut," said Sen. Charles Grassley of Iowa, ranking Republican on the Senate Finance Committee.

Other taxpayers benefited from an economic stimulus bill Congress passed this year. Small businesses, partnerships and others paying individual rather than corporate income taxes could deduct current-year losses from taxes paid up to five years ago, resulting in big refunds.

Taxing twists

Tax advisers instruct clients to plan ahead so they do not get big refunds, arguing that the refunds amount to an interest-free loan to the government of money the taxpayer could use during the year. They recommend adjusting the amount of taxes withheld or structuring tax payments so that taxpayers and the IRS come out roughly even.

Yet the economic downturn and bearish stock market disrupted those plans for some. Many investors had capital losses that offset their taxable gains, while others paid too much in estimated taxes. Some had spent thousands of dollars to get accountants to smooth out their tax picture, only to have it unexpectedly altered by economic circumstances.

"We had some clients who got their feathers ruffled a little bit," said Tom Ochsenschlager of the Grant Thornton accounting firm.

Layoffs can be a factor in bigger tax refunds. A worker earning enough to pay taxes at last year's 27.5 percent rate would have far too much withheld if a layoff means that person earned only enough while working to pay tax at a maximum of 15 percent.

The economy's struggles are expected to reduce the amount of income taxes paid by those who owed money on April 15. Because those taxpayers usually wait until the last minute, the Treasury Department will not have an accurate picture of those payments until early May, a spokeswoman said.

Time to amend

Experts say there still is time for taxpayers who do not think they took full advantage of the law to get a bigger refund. Amended tax returns can be filed for up to three years from the original due date to fix errors or add something.

"If the change is in the taxpayer's favor, the amended return also acts as a request for a refund," said John W. Roth, federal tax analyst for CCH Inc., a publisher for tax professionals.

More tax cuts took effect in 2002, including lower income tax rates, a new deduction for higher education and higher limits for contributions to both 401(k) plans and individual retirement accounts. The $1.35 trillion tax cut passed last year phases in slowly through 2010, meaning more reductions are in store for the rest of this decade.