Some fear filing as tax bills replace refunds
Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He counts on it to make an extra house payment, reduce student-loan debts or pay down credit cards.
But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.
A 40-year-old electrician, Oleson lives in Omaha, Neb., with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have made him worse off.
He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.
But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of a refund in the spring.
“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”
Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.
“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, N.J., office of WilkinGuttenplan. “They come in and they worry.”
But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.
Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.
The IRS estimates it will issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown.
So far, the average refund is less than at the same point in 2018 — $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season.
The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS withholding calculator. The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks.
The withholding formulas put in place last year were more generous, but they don’t reflect other changes, like the cap on state and local taxes — known as SALT — and end to the deduction of unreimbursed employee expenses, such as home offices and union dues.
For affluent taxpayers preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a more generous credit for children younger than 17.
Put it all together, and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.
The only way to have prevented a big surprise was to adjust withholding last year. Few people did that and it’s difficult.
“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, N.Y. “Your situation is going to be different from someone else with your income.”