Short History of Tax Refunds in the U.S.

From wartime taxes to modern e-filing, learn how tax refunds became a cornerstone of the American financial system.

Millions of U.S. taxpayers look forward to receiving their tax refunds. But that check from the government isn’t a gift: It’s money they overpaid in taxes throughout the year. Nevertheless, that money can bring relief, opportunity, and sometimes even a splurge on something nice. 

But where did tax refunds come from? And why do they exist in the first place? Let’s take a look at how tax refunds emerged and evolved into what they are today.

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The early days: No refunds, just taxes (1860s-1910s)

The U.S. government first imposed an income tax in 1861 to help fund the Civil War. This early version of taxation had no structured refund system — people simply paid what they owed. However, this first income tax was short-lived, as it was repealed in 1872. It wasn’t until the ratification of the 16th Amendment in 1913 that U.S. federal income tax, as we know it today, was born.

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The birth of tax withholding — and refunds (1940s)

Before World War II, most Americans paid their taxes in a lump sum at the end of the year, which often led to financial strain and widespread underpayment because U.S. citizens were having a hard time budgeting for their annual tax bill. To solve this, the Current Tax Payment Act of 1943 introduced automatic payroll withholding, requiring employers to deduct taxes directly from workers’ paychecks throughout the year.

With this new system in place, many taxpayers ended up overpaying — leading to the first modern tax refunds. What began as a way to ensure consistent tax collection became a system where the government essentially holds onto taxpayers’ money and returns any excess at year’s end.

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Tax refunds become the norm (1950s-1980s)

As withholding became an integral part of the tax system, refunds grew more common. By the 1950s, most taxpayers expected a refund rather than a tax bill. The government encouraged this by tweaking deductions and credits, ensuring that many workers overpaid slightly throughout the year.

A major shift came in 1975, when the Earned Income Tax Credit (EITC) was introduced. Designed to benefit lower-income workers, the EITC allowed many taxpayers to claim larger refunds than ever before. This policy turned the refund from a simple correction of overpayment into a financial tool that could put extra money into the hands of working families.

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The digitization of taxes (1990s-2000s)

The introduction of e-filing in the 1990s revolutionized the tax refund process. Suddenly, refunds that once took weeks or even months to arrive via paper check could be processed in days and quickly show up in taxpayers’ bank accounts thanks to direct deposit. By the early 2000s, e-filing had become the dominant method of filing, and tax refunds became faster and more accessible than ever.

Another major change was the rise of tax-refund financial products. Refund anticipation loans (RALs) and refund anticipation checks (RACs) allowed people to access their refunds sooner — often at the cost of steep fees. While the IRS cracked down on predatory refund lending practices in the 2010s, these products underscored just how essential tax refunds had become for millions of Americans.

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Tax refunds today: Bigger, faster, smarter

In 2023, the IRS issued over $650 billion in refunds, with the average direct deposit refund hovering just above $3,000. Withholding tables have become more precise, but many taxpayers still prefer to overpay slightly to ensure a refund rather than risk a surprise tax bill.

At Column Tax, we believe it should be simple, transparent, and easy for every taxpayer in the U.S. to receive every dollar of the tax refund they’re owed. That’s why we guarantee the biggest refund possible for your users when they file within an in-app tax filing experience powered by Column Tax. Our technology ensures that they get every deduction and credit they’re entitled to, without hidden fees.

Ready to integrate tax-filing into your app to attract, assist, and retain more users? Schedule a demo today to see how Column Tax can help.