Many families depend on receiving a tax refund and up until this year it has been something that most families could count on. However, a lot of taxpayers who usually get a refund on their income taxes may be disheartened to find that the amount is smaller than they are used to, or worse, they may actually owe money to the IRS this spring. The major reason for this change is the new federal tax law. In 2017, the last year before the law changed, about 75% of 135 million tax returns resulted in a tax refund check. According to the IRS, the average refund was around $2,800. As a result of the new tax reform, the IRS says that the number of refunds is down by about 24% over the first week of filing from last year, with the average refund for this year being around $1,800, so far.
This new tax overhaul has caused plenty of confusion for filers, leaving many of them left to ask why their refunds have changed. Some refunds have decreased because of changes in the law impacting deductions and itemizations; such as the new limit on property and local income tax deductions. Another impact is the shifting tax brackets, which now start at 10% and top out at 37% for income around $500,000.
However, if you get an unwelcome surprise when it comes to your tax refund or lack thereof, don’t be quick to put all the blame on the changes mentioned above, as it may be a result of your W-4 (this is the form that tells your employer how much money to withhold from your paycheck every pay period to cover income taxes).
Along with changes to deductions and the tax brackets, the IRS also made major changes to the “withholding tables” in the new tax law. So, if you didn’t adjust your withholding amount you may have inadvertently underpaid the government. In fact, there are more than 30 million Americans (21% of taxpayers) that didn’t have enough taken out of their paychecks throughout the year. This means that they may owe the IRS when they file their returns this year, according to the Government Accountability Office. Some taxpayers may be more vulnerable, such as two-income families, families with older dependents including children 17 or older, households with high incomes, homeowners who live in high property tax states and taxpayers with complex tax returns.
The IRS indicates that taxpayers with incomes below $100,000 will get their tax cut in the form of a bigger refund, while those with higher incomes received their tax cut in the form of higher paychecks through 2018; however, they might receive little to no refund. Fortunately, there are ways to avoid this refund mishap for 2019. If you want a greater refund you can adjust your withholding allowance by working with your employer. Keep in mind, the lower your allowance number for withholding the more money removed in taxes during each pay period. Before making any changes, check with your accountant or financial planner to ensure you are meeting today’s needs, as well as, next spring’s desire to obtain a refund check from the feds.