As taxpayers gear up for their first return filing under the 2017 tax overhaul, some may be surprised to find their refund is smaller than last year or worse, that they actually owe the IRS money on April 15th. An early report from the IRS predicts a 2% decrease in refunds this year compared to last year while the Government Accountability Office predicts that those owing money will climb from 18% in the 2017 filing season to 21% this filing season.
Many Americans are expected to owe less as a result of the 2017 tax law, but the decrease in refunds will create some disappointment and even anger among many. This begs the question, “What about all those tax cuts? Did they benefit me at all?”
Good question. The answer isn’t exactly simple but can be explained. If you’re basing your benefit received on the amount of your refund, you may be using the wrong metric. A large part of connecting the dots is in understanding the changing of the IRS guidelines used by employers for determining withholdings.
The new formulas put in place for 2018 were more generous, but were a broad instrument that didn’t factor in other changes that took place as a result of the Tax Cuts and Jobs Act. Some of these changes included the SALT cap, the repeal of personal exemptions, and the loss of miscellaneous itemized deductions. In essence, you are chasing a moving target because every taxpayer has a situation that differs from someone else, even with similar income.
Many taxpayers saw the benefit of the tax cut last year by receiving more money in their pockets each pay period based on the above formula changes—as opposed to a refund in April. However, this may have caused anyone who didn’t adjust their withholding rates to not pay in enough throughout the year based on their overall tax picture—i.e., what’s happening outside of your W-2. If you didn’t do this, you aren’t alone. Home Depot Inc. reported that only 1% of its employees changed their withholdings. It’s confusing, and many variables are at play—the tax bracket shifts, exemption changes, and many changes to credits and deductions to name a few.
While only about 5% of taxpayers are expected to pay more under the new law, many Americans are still unclear on how the cuts trickled down to them. Some of the biggest benefits of the overhaul include the doubled standard deduction, increased child tax credit, the easing of the Alternative Minimum Tax, and overall rate reductions for every taxpayer. When or if you actually felt those benefits once all factors are considered is the biggest question.
Your HORNE tax advisor is here to talk through your questions and concerns to help you get a better understanding of the effects of the changes on YOUR personal situation. Don’t hesitate to reach out to us.