Through April 9, the average refund was up $102 to $2,090, an increase of about 5% from refunds during the same period last year, the IRS says. Economists and tax analysts had earlier predicted the Bush administration’s $350 billion tax-cut package would boost refunds by more than 25%. The administration estimated the average refund would increase $300.

Economists are puzzled by the smaller-than-expected refunds. “It’s a bit of a mystery,” says Goldman Sachs senior economist Jan Hatzius.

Cynthia Latta, principal U.S. economist at Global Insight, says lower refunds could be caused by a stronger-than-expected stock market last year, which has led to higher capital gains payments. And households might have adjusted their withholding last year to account for the reduced taxes, she says. Other possible factors:

•The alternative minimum tax. The AMT, originally designed to prevent the rich from avoiding taxes, will affect an estimated 3 million taxpayers this year. The AMT vaporizes many deductions and credits, reducing or eliminating the benefits of last year’s tax cut. Among this year’s AMT victims: Vice President Cheney.

•Late filers. Some taxpayers who may be eligible for a big refund had to postpone filing their returns because of confusion over taxes on investment income.

Leslie Hershey, 42, of Armonk, N.Y., who does her family’s taxes using TurboTax software, delayed filing until this week because she wasn’t sure how much she owed on stock dividends. One of her financial institutions sent three corrections to her 1099s, the forms that report interest and dividends.

•The economy. Many taxpayers were unemployed or worked fewer hours last year, resulting in lower incomes and smaller refunds, says Mark Ernst, chief executive officer of H&R Block, the USA’s largest tax preparer. Refunds for Block customers are averaging about 5% higher this year than last.

Conversely, the Bush administration says an increase in some taxpayers’ incomes could have reduced refunds. “That would be great news for the economy, and it would mean benefits from tax cuts were even larger than expected,” says Treasury spokeswoman Tara Bradshaw.

While economists and the administration had been banking on higher refunds to provide a big stimulus to the economy in the first half of 2004, the economy appears to be doing fine without them. The government said Tuesday that March retail sales rose 1.8%, the best gain in a year.

The Internal Revenue Service reported Wednesday that the average refund grew to $2,436 for tax returns filed through last Friday. That’s a 9% increase from the average $2,230 check sent to early filers last year.

The IRS also said it’s seen an uptick in tax returns filed electronically, with strong growth among individuals using tax software to file from home.

The nation’s tax collectors estimate that, for the first time, more than half the tax returns filed by individual and family tax returns will arrive electronically.

“It’s fast, easy and you get refunds in half the time,” said IRS Commissioner Mark Everson.

Tax refunds tend to be higher during the early part of the filing season, as individuals expecting a check act quickly to claim their money.

This year’s growing refunds can be partly pegged to tax changes that took effect last year, which increased tax benefits for low-income families, said Kathy Burlison, director of tax implementation at H&R Block.

Those changes include an increase in the amount of child tax credit that can be claimed as a tax refund. The old law let families claim 10% of their earned income over $10,500, but a change now lets families claim 15% of earned income over $10,750.

Low-income families also benefited from a small increase in the earned income tax credit, a benefit aimed at lifting low-wage workers out of poverty.

“That’s certainly meaning bigger refunds,” she said.

Burlison said other tax law changes could be contributing to the trend. Taxpayers who live in states without income taxes got a new deduction for state sales taxes, and parents and students saw a deduction for tuition and fees increase.

A tax refund in the spring means a taxpayer overpaid throughout the previous year. Financial planners counsel taxpayers who get big refunds to make adjustments that let them get that money sooner.

“In general, it’s not a good idea to make an interest free loan to the government or to anybody else,” said Alan Straus, an attorney and certified public accountant in Manhattan.

“Most people would do better off adjusting their withholdings so that they take home more every week and don’t wind up with a huge refund at the end of the year.”

For others, waiting to get that tax refund in the spring might be the best way to save money.

“Everybody has different levels of discipline,” said Peggy Cabaniss, a certified financial planner in Orinda, Calif.

Taxpayers who got a big refund or a big bill who want to get closer to their true tax liability next year can change the amount of taxes withheld from their paychecks to either increase or decrease the amount withheld from their paychecks.

Constantly changing tax laws can make it difficult to anticipate what next year’s tax return will look like, Cabaniss said. She recommended taxpayers ask their tax professionals to get a forecast for the coming year.

“The tax laws are changing every year,” she said. “All of our finances and our taxes are getting more and more complicated, so it’s requiring more preplanning and more work,” she said.

Source:IRS.Gov