Lower Refunds Trending This Tax Season

Richard Parker  |

Image: iStock.com/grejak

Over the past few weeks, Americans have been receiving their 2018 tax refunds and the checks are being met with widespread outcry. When the 2018 Tax Cuts and Jobs Act (TCJA) was signed into law, the GOP made it a point to tell everyone willing to listen that their taxes were getting reduced significantly. However, taxpayers who have received refunds are complaining that they are much lower than what they got last year; some are even getting tax bills instead of refunds. Generally, there has been a 16.7% decrease in the average tax refund in comparison to last year’s refunds.

How is this so? How are people paying reduced taxes yet receiving smaller refunds? Could the government have been lying about the TCJA? Glenn Sandler, CPA, founder of G.I. Tax Service has some answers:

Why are tax refunds getting lower?

Firstly, the Tax Cuts and Jobs Act has, indeed, led to a reduction in taxes. According to this analysis by the Tax Policy Center, the average American is now estimated to be paying $1,600 less in taxes than they did a year ago. It should be noted, however that this effect is skewed greatly to higher-income households. The boost in after-tax income is only 0.4 percent for households in the lowest quintile, compared with 2.9 percent for those in the top quintile. Taxpayers in the top 1% of earners are estimated to realize a 3.4% boost. So why is it not reflecting in their refunds? Simple. Taxpayers got big refunds in the past because they were withholding too much of their income. So, at the end of the tax year, the extra amount they paid to the IRS during the year is returned to them.

This year, however, people received their tax savings during the year, leading to bigger monthly paychecks. This, undoubtedly, led to the reduction they are now seeing in their refunds. Simply put, the refunds are not getting smaller; rather, most people had received their refunds during the year.

Why are tax bills getting higher?

“What about those that expected refunds but got a huge tax bill instead? There is a simple explanation for this too,” says Glenn Sandler. In the new tax act, many itemized deductions have been removed, and the standard deduction has been doubled. However, a lot of taxpayers have not adjusted the way they file their returns to match these changes.

For example, deductions from state and local taxes, mortgage interest, charitable contributions, medical expenses, and many others have been reduced. Furthermore, the personal and dependent exemption has been removed, as have deductions for unreimbursed employee expenses, theft and personal casualty losses, tax preparation fees and many others.

This has made taking the standard deduction much more beneficial than itemizing personal deductions.

Bottom line

Your tax bill may be bigger because you have not adjusted your filing to suit the new tax laws. Contact a G.I. Tax Service professional today to discuss your options and determine if it is better for you to itemize or take the standard deduction.

For those who don’t want a reduction in their refunds, there is a simple solution for this too. Just ask your employer to withhold more of your income. While this will mean a smaller paycheck as you effectively provide the government with an interest-free loan throughout the year, you can collect a big refund at the end of the year to pay off that debt or go on that trip.

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