Every year, Steve Courtney holds a tax party of sorts. His accountant comes to his home in Livonia to prepare tax returns for a bunch of the family, including his brother, his mother, himself.
“We’ve been doing it for years,” said Courtney, 58, who is the sports director at WJR Radio in Detroit.
“In the past, it’s been a bit more festive.”
Not so this year, as taxpayers sitting in kitchens and offices across the country are discovering the implications of the new tax rules, the extra cash in their paychecks in 2018 and the realities of tax life itself.
“My refund is one third of what I’m used to,” Courtney said. “My brother has never owed in his adult life and, oh, he owes this year.”
Instead of his usual refund, his brother discovered he’ll be writing a check, not waiting for a refund.
Why are so many surprised at the bottom line on their 1040 returns? What factors are coming into play to make you feel like you’re not much of a winner in the tax-refund game?
It’s impossible to make sweeping statements on why you might be getting a smaller refund or face a higher tax bill than you might expect after a massive tax overhaul that went into place in 2018.
Tax situations are so different. One return might be impacted by one or two changes in the Tax Cuts and Jobs Act of 2017; another might be hit by far more.
Even so, the trend appears to be that federal tax refunds on average will be smaller for 2019 than a year ago.
The average federal income tax refund as of the third week of filing season, through Feb. 15, was $2,640. That’s down 16.7 percent from the year earlier, according to Internal Revenue Service filing season statistics. The average refund a year ago was $3,169 through Feb. 16, 2018.
But here is a quick look at some things that could be playing into your numbers:
1. Are you a two-wage earner family?
The odds are good for working couples that both of you received more money last year in your paychecks, thanks to changes in the tax withholding tables.
Many workers — if they didn’t adjust their withholding on their own through their employers — didn’t have enough money set aside to cover the taxes they’d owe now.
Consider this example: A Michigan couple went from a refund of $2,605 based on their 2017 tax returns to a refund of just $10 now, according to George Papadopoulos, a certified public accountant and financial adviser in Novi.
Both spouses bring home paychecks. They own a home, have older children who are no longer dependents and had about $10,000 in dividends and interest to report.
Their adjusted gross income hit $163,000 in 2018, up from $155,000 in 2017.
So they made more money, even though they faced a lower tax rate.
They went from $25,500 in itemized deductions on the 2017 return to taking the new, nearly double, standard deduction of $24,000 this tax season.
They took the standard deduction in 2018, instead of itemizing, because of some changes in the new tax law: A new $10,000 cap on the deduction for state and local taxes put a limit on how much they could claim on the 2018 return. And they lost the ability to claim miscellaneous itemized deductions.
The couple lost two personal exemptions. Their taxable income was $139,000 in 2018, up from $121,000 in 2017.
Their total tax owed went up from $20,881 in 2017 to $21,745 in 2018.
Yet here’s where the tax withholding tables came into play.
While they’d experience a tax cut under the new rules, this couple wouldn’t qualify for a refund because their withholding simply covered their taxes owed.
But they only had $21,755 withheld from their two jobs in 2018 — down from $23,486 withheld in 2017.
“The tax cuts are real but they sure don’t feel like it to most taxpayers,” Papadopoulos said.
Taxpayers saw many benefits of the tax cut immediately in their paychecks since the payroll tax withholding tables were adjusted in early 2018.
The IRS encouraged taxpayers to check their income tax withholding in 2018, which very few did, he said.
He said the IRS should, perhaps, have “raised more alarm bells that come April 15, 2019, they should expect unpleasant surprises, if they did not take action.”
“Well, we all know how this worked out.”
He’s seeing many clients receive smaller tax refunds than the prior year and some owed more than the prior year.
Many times, Papadopoulos said, he was told by clients: “It certainly does not feel like a tax cut, George.”
2. Did you lose some key tax breaks?
Some familiar deductions were eliminated or limited under the Tax Cuts and Jobs Act of 2017.
Employee business expenses that weren’t reimbursed by your company once could be used as a tax deduction. Not any more.
That’s hurts some groups, such as long haul truckers, who were used to getting large deductions for unreimbursed expenses, said Mark Steber, chief tax officer for Jackson Hewitt in Sarasota, Florida.
H&R Block experts noted that the mileage issue has come into play for others, as well.
“I had a client that was shocked when she was told that she had a balance due because she was not able to take mileage for her job. She is a traveling nurse and for years she could always count on a $3,000-plus refund,” according to an H&R Block tax professional in New Hampshire.
Others may lose out on deductions for supplies or travel expenses that apply to their jobs but aren’t reimbursed by an employer. (Key point to note: The change does not affect the expenses that non-wage earning, self-employed individuals (e.g., those individuals filing Schedule C or Schedule F) are allowed to claim to offset their income subject to the self-employment tax.)
3. Are your children getting older?
If your child was 17 or older in 2018, you’re getting a smaller tax break for that dependent child than you did on your 2017 tax return.
You can no longer claim a personal exemption for yourself or your children — which would have been $4,150 each in 2018 — under the new tax rules. It adds up for a larger family.
The maximum child tax credit has gone up to $2,000 from $1,000 under the new tax rules. And the income threshold for claiming the credit jumps all the way to $400,000 for married filing jointly and $200,000 for others before any phaseout.
The child must be 16 or younger at the end of 2018 to claim the $2,000 credit.
A new $500 family tax credit might apply to dependents ages 17 to 18. If the child is a full-time student, the credit would apply through age 23. Various rules apply, as well.
Even if you’re qualifying for the $500 credit per older child, though, it alone would not offset the loss of personal exemptions. Larger families with older kids may end up getting stung by the change, experts say.
On the plus side, the child tax credit has doubled ($2,000 now instead of $1,000 last year) and it’s available to far more consumers because of changes in the income limits, Steber said.
So those changes have helped many families, he said.
4. Did you update your W-4 after tax reform?
Many people received more money after taxes were taken out beginning in 2018 because of new withholding tables.
Yet if you received $1,000 more during the year, thanks to the new tables, it’s going to cut into the size of your refund or even boost how much you owe in taxes now.
“It’s a perfect time to take another look at the W-4,” said April Walker, lead manager of the tax practice and ethics team at the American Institute of CPAs.
Once you’ve completed the 2018 return, you’d have a better understanding of how the new rules hit your return. Big changes aren’t in store for 2019. (It is possible, of course, that tax legislation could happen during 2019 that could be effective for this year. But as of now, much of the 2018 rules are likely to be the same in 2019.)
The online Internal Revenue Service withholding calculator is a good place to start reviewing some numbers to make sure you have the right amount of tax withheld from your paycheck at work. You need to make any changes through your employer.
To use the calculator, you must gather recent pay stubs and your most recent income tax return. A copy of your completed Form 1040 will help you estimate your 2019 income and other characteristics.
Making such changes now on your W-4 might be particularly important for people who have several sources of income, including side jobs, and now face a bigger tax bill than they’d want in the future.
You can update your W-4 through your employer at any time. Tax season is a good time to do so, though, since you may receive some advice from a tax professional or via the software you use to prepare your tax return.
“Some people weren’t paying attention when their withholding was changed in 2018,” Walker said.
Yet if you’re unhappy with the results this tax season, you could want to change your withholding early this year to prepare for your 2019 tax return.
So, when are your taxes due?
Some people are delaying doing their taxes and claiming they’re afraid to do their taxes because of all the confusion this year.
But you don’t want to drag your feet too long.
The filing deadline to submit 2018 tax returns is Monday, April 15, for most taxpayers. (Taxpayers who live in Maine, Massachusetts and the District of Columbia have until April 17 because of holidays in those states.)
