NerdWallet 2020 Tax Report
Americans’ Refund Expectations Plummet After High Hopes in 2019
By Elizabeth Renter
January 28, 2020
Only about half (51%) of Americans filing a 2019 federal tax return this year expect to get a refund, according to a new NerdWallet survey conducted online by The Harris Poll. That’s in stark contrast to the 86% of federal filers who told NerdWallet that they expected a refund on their 2018 federal return when a similar question was asked in our 2019 Tax Report after the implementation of the Tax Cuts and Jobs Act.
More than 4 in 5 (82%) Americans plan on filing a 2019 federal tax return, according to the survey of 2,002 U.S. adults. In addition to the pessimism surrounding refunds, 1 in 5 (20%) prospective filers expects a tax bill. For those who owe money, if last year’s tax bills are any indication, many will tack on interest and fees when they’re unable to pay the balance in full.
“A refund at tax time can feel like a windfall, and an IRS bill can be a big hit to your finances,” says Andrea Coombes, NerdWallet’s tax specialist. “But regardless of the expected outcome when you file your taxes this year, planning ahead can go a long way toward improving your long-term financial health.”
Note: Throughout the report, “filers” refers to Americans in our survey who said they plan/planned on filing a federal tax return for the tax year specified.
- Managing expectations. Just half (51%) of those filing a 2019 federal return this year expect an income tax refund, the survey found, compared with 86% of federal filers who said they expected a 2018 refund when we asked a similar question last year in light of the “new tax law.”
- Owing the IRS and failing to pay. Nearly a quarter (24%) of filers owed the IRS money when they filed their 2018 federal income tax return last year, according to the survey, and 5% of them haven’t paid anything toward that tax bill.
- Trusting tax preparers. Of the Americans who have used a tax preparer to file income taxes in the past five years, 16% sign and submit prepared returns without reviewing them, according to the survey. This could be, in part, due to misplaced confidence — an estimated 91 million Americans (36%) incorrectly believe tax preparers are the ones responsible for additional payments owed to the IRS if an audit uncovers errors in a return they completed.
Tax season outlook
More than 208 million U.S. adults (82%) plan on filing a 2019 federal income tax return in 2020, according to NerdWallet’s analysis of the data. Some of these filers (27%) are feeling confident about filing, while a similar proportion (26%) are feeling stressed or anxious, our survey found.
Whether confident or stressed, many of these filers are confronting their emotions head-on: Nearly half (46%) will prepare their 2019 federal return themselves using tax software. One-third (33%) will turn to a tax preparer.
Refunds and tax bills
Just half (51%) of those filing a 2019 federal return this year expect an income tax refund. When we asked a similar question in a survey about a year ago, 86% of those who planned to file a 2018 federal return said they expected a refund in light of the Tax Cuts and Jobs Act . In reality, as of November 2019, 72% of 2018 individual returns filed had resulted in a refund, according to NerdWallet’s analysis of IRS data.
Those expecting a 2019 federal refund this year estimate they’ll receive $2,207, on average. For some, those refunds mark an opportunity to get ahead — whether that means putting the money away for retirement or using it toward paying off student loan and credit card debt.
One in five (20%) filers expect to owe for 2019 federal taxes when they file this year. Those filing anticipate having to pay $2,667, on average, according to the survey. How these taxpayers handle this underpayment could have long-term effects.
Tax tip: “Once you have an idea of how your tax return will shake out, it pays to have a plan,” Coombes says. “If you’re expecting a refund, think about putting some of it toward paying down any credit card debt. That can reduce your total interest payments, and help to free up your disposable income for living expenses and savings in months to come. If a tax bill is in your future, start thinking now about how you’ll pay it off. Being on top of it may help reduce or even eliminate interest and fees.”
Owing the IRS
Nearly one quarter (24%) of filers last year owed the IRS money when they filed their 2018 federal income tax return, according to the survey. Some of those who owed chose expensive, if perhaps necessary, repayment options, tacking on:
Interest: 17% of those who owed used a credit card to pay their tax bill. Not paying the balance in full with every statement or making only minimum payments can compound that tax debt with interest.
Interest and fees: 16% of those who owed set up an installment agreement with the IRS. The IRS charges interest and penalties on tax bills that aren’t paid in full immediately, even if you have a payment agreement (which may also require a setup fee).
Interest, fees and potential legal action: 5% of those who owed haven’t paid any of the money. An unpaid tax bill begins collecting interest and fees right away, but continuing to ignore the debt can result in a lien against your home or other assets, collection attempts and eventually property seizures and restrictions on international travel.
Tax tip: “Owing money is not fun, and owing money to the IRS can be particularly nerve-wracking,” Coombes says. “Ideally, you pay your bill right away, with a bank transfer or with a credit card you pay off in full when you get your statement. But if neither of those options is possible, an IRS installment agreement can be a good alternative.”
Coombes points out that IRS interest rates generally are lower than credit card rates. But interest rates aren’t the whole story. She recommends comparing your credit card interest rate plus the convenience fee for using that card with the IRS’ interest rate, penalties and possible fees.
Paying to file taxes
Americans who filed a 2018 federal tax return in 2019 typically paid $100 to prepare/submit their tax returns, according to the survey. But many could have likely paid less, or nothing at all.
The IRS offers Free File — a program that features free tax software access to taxpayers with 2019 adjusted gross incomes of $69,000 or less — in conjunction with several well-known tax preparation companies. Also, many of these and other tax prep companies offer free versions of their software for federal and state returns, available to people with less-complex tax situations.
Just 15% of federal filers say they spent $0 to file their 2018 income tax returns last year, despite the IRS reporting that 70% of taxpayers qualify for Free File, and more possibly qualify for tax companies’ free federal and state versions.
Some taxpayers are paying a premium — 8% of those who filed a 2018 federal return say they paid more than $1,000 to prepare/submit their return last year. These filers likely have complex returns and hire a professional to make the process smoother.
Tax tip: Taxpayers who anticipate an adjusted gross income of $69,000 or less on their 2019 tax return can access Free File partner sites through the IRS Free File page. If you make over $69,000, you may still qualify to use free versions of popular tax software, generally available to those with simple tax situations such as income from a single job and no itemized deductions.
There can be a sense of relief in handing a complicated tax return over to a professional and then wiping our hands clean of it. But ultimately, each of us is responsible for our own tax returns — no matter who prepares them.Andrea Coombes, NerdWallet Tax Specialist
Using tax preparers: Blind trust and misconceptions
Over half (53%) of Americans have used a tax preparer to prepare or file an income tax return in the past five years, and a third (33%) of filers plan on using a tax preparer for their 2019 federal return, according to our survey. But these taxpayers may be handing over an inordinate amount of trust along with paying tax preparation fees.
Nearly half (45%) of Americans who have used a tax preparer in the past five years say they only “glance” through their return before signing and filing it, but “generally trust” that their preparer doesn’t make any mistakes. Another 16% sign their return without reviewing it at all.
As well, the survey indicates many Americans think they’re getting a lot more than tax preparation for the fee they pay. Over a third (36%) of Americans incorrectly believe tax preparers are responsible for additional payments owed to the IRS if an audit uncovers errors in a return they completed. And over half (54%) of Americans incorrectly believe tax preparers are responsible for defending a tax return they’ve prepared to the IRS in the event of an audit.
Tax tip: “There can be a sense of relief in handing a complicated tax return over to a professional, then wiping our hands clean of it. But ultimately, each of us is responsible for our own tax returns — no matter who prepares them,” Coombes says. “It makes sense to do a thorough review of your return before signing it, as it’s ultimately your money on the line.”
The misplaced confidence of having someone defend your tax return in case of an audit can be comforting, since many Americans fear being audited, according to our survey.
About 1 in 5 (21%) filing 2019 federal returns say they would be most worried about getting audited if they discovered they filed their income taxes incorrectly. Slightly more (27%) say they’d be most worried about having to pay more if they filed incorrectly. Both are possible, though largely unlikely.
In 2018, just about 0.6% of individual federal income tax returns were audited, according to IRS data. Newly released figures suggest even fewer were audited in 2019 — 0.45%. In general, the higher your adjusted gross income, the greater your risk of being audited, as seen in the chart below. The exception to this is taxpayers claiming the earned income tax credit, or EITC.
This credit goes to low-to-moderate income working people and can result in thousands of dollars in a refund. To stop potentially improper refunds, about 37% of the returns examined in 2018 were reviewed specifically because of the EITC, according to NerdWallet’s analysis of IRS data.
Tax tip: The IRS can flag your return for audit for any number of things — even chance. Take the time to ensure your entries are accurate, whether you’re using software to prepare your return or paying a tax preparation professional. If the IRS decides to examine your return, you want everything to be buttoned up, as you will be held accountable if they find something wrong.
Reducing your tax burden
Another way to prevent an audit: Abiding by the law. Failing to report income on your tax return is unlawful, even if that income doesn’t come in a traditional paycheck. Yet, 1 in 5 (20%) Americans think getting paid in cash, or “under the table,” is a legal way to potentially reduce how much you might owe to the IRS when filing a tax return. This misconception is most prevalent among the younger adults — 30% of Generation Z and 29% of Millennials think this practice is legal compared with 19% of Generation X and 11% of baby boomers.
Tax knowledge could be working against taxpayers in another way, too. About 2 in 5 (39%) Americans don’t know that contributing to a retirement account is a legal way to potentially reduce how much you might owe when you file your taxes (24% are unsure whether this is true and 16% say it is not), according to the survey.
Tax tip: “There are many legal ways to reduce what you owe the IRS, and contributing to a retirement account is just one,” Coombes says. “Funding a 529 account for your child’s education and donating to charity are others.
“The really great news about contributing to an individual retirement account, or IRA, is that you can contribute all the way up until the April 15 tax deadline and have that contribution apply to the previous year,” Coombes says. “It’s one of the few ways you can reduce your tax bill after the calendar year has ended.”
The online survey was conducted in the U.S. by The Harris Poll on behalf of NerdWallet from Nov. 18-20, 2019. The survey of 2,002 U.S. adults ages 18 and older included 1,651 who will file a 2019 federal income tax return. This online survey isn’t based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, contact Jessica Ayala at [email protected].
The 2019 Tax Report data are from a Dec. 11-13, 2018, survey of 1,822 Americans who planned to file 2018 federal income tax returns.
Throughout the report, “filers” are Americans who indicated they plan/planned on filing a federal tax return in the year specified.
NerdWallet defines generations as: Generation Z, born in 1997 and later; millennials, born 1981-1996; Generation X, born 1965-1980; baby boomers, born 1946-1964; and the silent generation, born 1928-1945. If a generation isn’t named in a specific result, it’s due to a small reporting base that cannot be considered a representative sample.
Estimates of 2018 individual federal returns resulting in refunds or tax bills are from IRS 2019 filing season data as of Nov. 22, 2019.
 In this survey, filers were asked what outcome they anticipate for their 2019 federal income tax return with 51% reporting they expect to receive a refund. When asked in December 2018 about their 2018 federal income tax return, filers were asked about their expected outcome in light of the “new tax law,” referring to the Tax Cuts and Jobs Act of 2017.