Smaller Tax Refunds Catch Some Taxpayers by Surprise

One of the chief goals of the 2017 tax reform package – aptly named the Tax Cuts and Jobs Act (TCJA) – was to cut taxes for most taxpayers. And while many taxpayers are seeing modest increases in their paychecks, some are unhappy to discover they are receiving smaller refunds than they had expected. Worse yet, others are finding they owe money for the 2018 tax year.

Based on data provided by the IRS, the number of tax refunds issued from the start of tax filing season on January 28 through February 14 declined from 13.5 million for the same time period last year to 11.4 million, a drop-off of 16 percent. What’s more, the average amount of the refunds issued so far this year is only $1,949, as compared to $2,135 in 2018.

Part of the issue is that along with increasing the standard deduction, the TCJA also eliminated critical tax breaks, such as deductions for state and local taxes, and deductions for non-reimbursed business expenses, while creating new benefits for other taxpayers, including business owners.

Another factor is that shifting tax brackets changed the amount of money taxpayers need to have withheld from their paychecks. The Government Accountability Office study estimates that 30 million Americans, or 21 percent of taxpayers, didn’t have enough taken out of their pay. Confusion among taxpayers wasn’t helped when the IRS updated calculations for withholding, but the tables didn’t translate precisely from the old law. The new tables failed to factor in changes, such as exemptions for dependents and reduced itemized deductions.

Not surprisingly, many taxpayers are up in arms, especially those who have received big refunds in the past and had already earmarked tax refund money for specific purposes. Some are blaming the shortfall on the new tax law. Taking a glass is half full approach, the Treasury Department has communicated that smaller refunds mean that taxpayers are having the appropriate amount withheld from their paychecks.

Still, as a concession to the many changes put into effect by the TCJA, the IRS won’t expect those who owe money to pay the entire liability if they can’t. In fact, the agency has offered payment plan options and is even waiving penalties for those who did not have enough withheld from their paychecks. Penalties will be waived for taxpayers who paid at least 85 percent of their total liability through withholding, quarterly estimated payments or a combination.

Still, the IRS is urging taxpayers to adjust withholding for 2019 now to avoid future penalties and any other tax surprises when filing tax returns next year.

Questions about this blog or other Tax Planning and Preparation questions? Contact Carly Roberts, Manager, Tax & Business Services.