Morgan Stanley: Tax refunds could increase by $62 billion next year

Morgan Stanley: Tax refunds could increase by $62 billion next year
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Tax refunds could increase by about $62 billion next year, the first year when taxpayers will file under the new tax code, according to a paper released this week by Morgan Stanley.

"With the change in taxes ... American workers who generally overwithhold each year are now likely to be significantly overwithheld this year," economists with the bank wrote.

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President TrumpDonald John Trump Trump responds to calls to tear down monuments with creation of 'National Garden' of statues Trump: Children are taught in school to 'hate their own country' Trump accuses those tearing down statues of wanting to 'overthrow the American Revolution' MORE signed a sweeping tax-reform bill last year that lowers tax rates and increases the standard deduction. The tax changes generally take effect for the 2018 tax year, meaning that they first apply to the tax returns that people file in early 2019.

Morgan Stanley estimated that, based on Joint Committee on Taxation data, that the tax law will lower personal income taxes by about $104 billion for the 2018 tax year.

Money is withheld from paychecks for federal income taxes throughout the year, and the amount withheld depends in part on the number of allowances taxpayers claim. About 75 percent of taxpayers overwithhold, meaning that they receive refunds when they file their taxes.

The IRS issued guidance this year to update tax withholding to reflect the new tax law, and the agency has also been encouraging taxpayers to check and see if they need to adjust their allowances. But many employees don't update their withholding allowances, and may as a result have too much money taken out of their paychecks for taxes during the year, according to Morgan Stanley.

According to a study cited by the Morgan Stanley paper, taxpayers only adjust their withholding by less than 40 percent of the refund level in the first year following new tax legislation. As a result, Morgan Stanley estimated that tax refunds could go up by about $62 billion next year, the paper said.

The IRS has reported issuing more than more than $284 billion in refunds this year, as of May 11.

Morgan Stanley said the increase in refund amounts should be manageable for the Treasury Department under the debt limit, when it is reinstated on March 1, 2019. The firm's economists said that Treasury should have more than enough cash on hand to pay out refunds issued after March 1 of next year.