Yes, tax refunds did get smaller
Changes meant many had too little withheld
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.
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.