Posted on April 11, 2023
Payments by individuals with their federal income tax return filings are due to the IRS by Tuesday, April 18–a week from today, when the tax returns are also due. It is still way too early in the process to make any assessments of the amounts paid compared to prior years. Many people file early in order to get refunds; indeed most taxpayers receive refunds. But taxpayers who owe taxes when they file–disproportionately higher-income taxpayers–generally delay making their payments until close to the tax filing deadline. Even if taxpayers file their taxes early and owe amounts, they can separately have the payment debited from their bank account by the tax deadline or send a check by U.S. mail postmarked by the tax deadline. And some taxpayers apply for automatic six-month filing extensions, although they must pay an amount by the April filing deadline that is at least as large as the amount they will owe or they face late-payment penalties and interest. Such delays in paying until the April filing deadline make it impossible to glean much from the daily data on the amounts of tax payments paid early–it is just too small an amount, and that is where we stand today (see the chart below).
It will probably be three weeks or so, into early May, when the IRS will be largely done tabulating the payments, and we may be able to draw some conclusions about the magnitude of the payments a little before then. On the chart below, it is difficult to see the line for the 2023 final-payments-to-date in comparison to other years, because the daily data stop with yesterday’s amount, and the bulk of the payments this filing season are still to come. (Note that in the Treasury Department data, individuals’ final payments (the amounts paid with their tax returns) are lumped together with their quarterly estimated payments, a much smaller amount in April, and we call the merged category “nonwithheld receipts”, which also includes amounts paid as a result of audits or amended returns. Nonwithheld receipts are basically all individual income tax payments other than those withheld from paychecks by employers and remitted to the IRS.)
The amounts of final payments with tax returns are important for various reasons. This year, we add the federal debt limit to the mix. The amount of taxes paid with individual income tax filings is highly variable from year-to-year and extremely difficult to predict. If payments are much weaker than expected, then the debt limit will be reached sooner than expected. And higher-than-expected amounts will delay the time when the debt limit becomes binding. The amounts paid are important for other reasons besides the size of the federal deficit and debt. A large amount of payments drains funds from the private sector, often causing the higher-income taxpayers who pay the bulk of final payments to sell stock or come up with other ways of financing the payments, which can affect financial markets. Those effects can feed through to goods purchased by those individuals.
Our best guess going into the filing season has been that the substantial drop in the stock market last year, following the rapid run-up in 2021, along with the housing market decline in 2022, would cause capital gains realizations and related income of higher-income taxpayers (such as bonuses) to drop in 2022. We expect that will cause final payments with tax returns to decline this filing season, perhaps substantially, compared to the amount paid in 2022. Final payments in 2022 boomed well above the 2021 amount, and the 2021 amount itself was surprisingly large given the recession in 2020. We shall see if final payments do indeed decline this filing season.
And in the meantime, I need to get back to finishing up my own tax return.
