YOUR TAX REFUND MAY GO AWAY, AND HERE’S WHY
By MARY LYNNE DAHL, CFP®
March 21, 2019
This tax season, however, some people who would normally get a check will not get one, or will but it will be less than they expected. This may cause some real heartburn, because many people count on that refund for a major purchase, a vacation to Disneyland or a way to pay off a credit card that they have run up during the year. These folks will be upset and wondering what happened. Here is the explanation:
The federal administration passed a new tax bill called The Tax Cuts and Jobs Act of 2017. The bill was supposed to stimulate the economy by lowering corporate and personal income tax rates. The bill increased the standard deduction, eliminated or reduced certain itemized deductions, gave small businesses that operate as “pass-though” entities a 20% gross income deduction (if they meet qualifications), increased the child care credit and generally disrupted many traditional tax strategies. At this point, the jury is out on whether or not it has provided any stimulus to the economy.
The new tax law passed by the Trump administration lowered taxes for most middle income workers. This required employers to withhold less from an employee’s paycheck. The IRS sent out a schedule of how much would now need to be withheld from pay at various pay rates and whatever dependents were being claimed by the worker. This resulted in less tax being withheld and a bigger paycheck for lots of workers.
According to studies on this subject, average increases in take-home pay are in the range of $50 -$105 per paycheck. With 26 paychecks annually, that amounts to between $1,300 and $2,700 per year in increased take-home pay. Coincidentally, the average refund is $2,763, according to various sources. So, the net result is a smaller or no refund, because the worker already received the refund amount as a take-home pay increase. With approximately 75% of taxpayers getting a refund each year, it appears that federal income tax refunds are currently 16% lower than last year. Not everyone has filed their federal tax returns yet however, so these numbers could change, but it does indicate a noticeable change.
At the same time, the new tax law has reduced the deduction allowed for real estate, state and local taxes to a total of $10,000. For taxpayers whose combined real estate, state and local taxes exceed $10,000, the excess over that amount is not deductible. In addition, the use of personal exemptions has been eliminated but is replaced by a standard deduction amount that is almost twice as much as in prior years. Finally, some deductions have been eliminated entirely and charitable gifts now require careful planning for the donor to get the benefit of making the gift.
Because 2018 is the first year that all of these new rules are in effect, many people, including tax preparers, are being forced to re-educate themselves and plan better for 2019. If you usually get a tax refund and have not yet filed your federal income tax return, don’t be shocked if your refund is substantially less. Talk with your tax preparer and get some financial advice so that you can be better prepared for your 2019 tax return.
And by the way, remember that saving through overpaying your taxes for a year in order to get a big refund is not good financial planning. Better use of your money is not to lend it to the government interest-free in the first place. Instead, use those dollars that would have been withheld and paid back as a refund at tax time, to pay off debt, and then don’t run up any more debt in the future. That is a subject near and dear to my financial planning heart, but not the subject of this article. Look for other and future articles to get more tips on getting out of debt and achieving the benefits of a debt-free life.
The bottom line of tax refunds is that if your take-home pay went up, your tax withholding went down and you have already received what would have been a refund in prior years. No body lost money. You received it and maybe you spent it. Now you know and can plan better next year.
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