Yes, tax re­funds did get smaller

Changes meant many had too lit­tle with­held

San Francisco Chronicle - - FRONT PAGE - KATH­LEEN PENDER

The first num­bers from this year’s fil­ing sea­son seem to con­firm fears that many work­ers had too lit­tle with­held from their pay­checks last year, and will get a smaller re­fund or owe more than ex­pected with their 2018 re­turns.

IRS statis­tics for the first five days of this year’s tax-fil­ing sea­son show that 24 per­cent fewer tax­pay­ers got fed­eral re­funds than the same pe­riod last year, and the av­er­age re­fund was just $1,865 this year — 8.4 per­cent lower than last year.

How could this hap­pen, when the Tax Cuts and Jobs Act was sup­posed to cut taxes for the vast ma­jor­ity of Amer­i­cans?

The law, which Con­gress passed with no Demo­cratic votes, made nu­mer­ous changes that both raised and low­ered fed­eral taxes. The net ef­fect was a tax cut for most peo­ple.

Given the vast num­ber of changes, many peo­ple thought the IRS would change the W-4 forms that work­ers file with their em­ploy­ers, to align them with the new law. But that would have re­quired ev­ery worker to fill out a new form.

So in­stead, the IRS changed the in­struc­tions to the form, but not the form it­self. It also changed the with­hold­ing ta­bles that tell em­ploy­ers how much tax to with­hold from em­ployee pay­checks based on how many al­lowances they claimed on their W-4 form.

Here’s the rub: The change to the with­hold­ing ta­bles re­flected the across-the-board cut in tax rates, and the near dou­bling of the stan­dard de­duc­tion.

“It just so hap­pened those changes were ben­e­fi­cial for just about ev­ery­one,” said Nathan Rigney, lead tax re­search an­a­lyst with H&R Block. The change in with­hold­ing ta­bles ig­nored “all the things that

were not ben­e­fi­cial.” This in­cludes the loss of the per­sonal ex­emp­tions, the elim­i­na­tion of mis­cel­la­neous item­ized de­duc­tions and the new $10,000 limit on the pre­vi­ously un­lim­ited item­ized de­duc­tion for all state and lo­cal taxes com­bined.

The IRS and oth­ers warned re­peat­edly last year that there could be some nasty sur­prises at tax time if peo­ple didn’t read the new W-4 in­struc­tions and file a new form if needed.

Holly Had­lock of Mill Val­ley heeded that call. She and her hus­band, who both work for the fed­eral gov­ern­ment, had about $35,000 in item­ized de­duc­tions last year. With the new $10,000 cap on state and lo­cal taxes, she knew she’d they’d be tak­ing the $24,000 stan­dard de­duc­tion for 2018, los­ing about $11,000 in de­duc­tions. They also had one daugh­ter they could no longer claim as a de­pen­dent.

When Had­lock no­ticed in early Fe­bru­ary that their em­ployer was with­hold­ing about $100 less from each of their pay­checks, “I in­creased it to what it was be­fore, so I wasn’t ow­ing thou­sands of dol­lars” come tax time, she said.

When she fin­ished her taxes, she was still up­set to see that her to­tal fed­eral tax bill this year was al­most $43,800, ver­sus $41,600 last year. She’s ac­tu­ally get­ting a small re­fund, but only be­cause she also in­creased with­hold­ing from a pen­sion she gets from an exspouse.

“I’m to­tally in­dig­nant,” she said. “I prob­a­bly pay more taxes than Trump.”

The U.S. Gov­ern­ment Ac­count­abil­ity Of­fice es­ti­mated last year that 21 per­cent of tax­pay­ers would be un­der­with­held when they file their 2018 re­turn, com­pared with 18 per­cent had the tax law not changed.

In Jan­uary, the IRS “an­nounced some re­lax­ation” of the penalty for fail­ing to pay enough tax through with­hold­ing or es­ti­mated tax in 2018 “if the fail­ure was due to changes made by the Tax Cuts and Jobs Act,” said Mark Lus­combe, a prin­ci­pal tax and ac­count­ing an­a­lyst with Wolters Kluwer.

It’s too soon to say whether the 8.4 per­cent drop in re­funds re­ported by the IRS will hold up through tax sea­son. But Rigney said it’s con­sis­tent with what H&R Block is see­ing.

“We have been pro­ject­ing for a long time that a lot of tax­pay­ers will see de­creases in re­funds,” Rigney said. He’s been hear­ing con­ver­sa­tions that go some­thing like this: “Maybe you got a $500 tax cut, but your with­hold­ing went down down by $1,000, so your re­fund went down by $500.”

Clients who were pre­pared for this “are ex­pect­ing it, un­der­stand it, but they are still frus­trated. You don’t be­lieve it till you see it or you for­got,” Rigney said.

Cyn­thia Leach­moore, pres­i­dent of Cal­i­for­nia So­ci­ety of En­rolled Agents and owner of So­quel Tax Ser­vice in Santa Cruz County, said an­other rea­son re­funds could be down is be­cause tax pre­par­ers, start­ing this year, must get ad­di­tional doc­u­men­ta­tion from clients claim­ing head-of-house­hold sta­tus and the child tax credit. That could be cut­ting down on some fraud­u­lent re­funds.

The IRS data, re­leased Fri­day, also showed that it re­ceived 12.4 per­cent fewer re­turns in the first five days of this year than last year, and pro­cessed 25.8 per­cent fewer.

Leach­moore cited a num­ber of rea­sons for the slow start. The gov­ern­ment shut­down in Jan­uary “made peo­ple skit­tish about book­ing ap­point­ments” be­fore Fe­bru­ary, she said. Also, banks and bro­ker­age firms are tak­ing longer ev­ery year to send out the 1099 forms on in­vest­ment in­come.

Leach­moore said she has filed half as many re­turns this year as she did the same time last year.

Lea Suzuki / The Chron­i­cle

Tax pro­fes­sion­als Fran­siska Kane (left) and Nathellyn Olano dis­cuss a client’s case at an H&R Block of­fice on Mis­sion Street in San Fran­cisco. Tax­pay­ers are see­ing smaller re­funds for 2018.

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