That vacation you were planning with your tax refund? You may have to scale it back a bit.
From the Internal Revenue Service to local tax preparers, the consensus is that refund checks are shrinking after the first full year of the overhaul of the federal tax code.
The IRS, in fact, reported this month that the average refund is down about 8 percent from last year when the average taxpayer got a refund of about $2,700.
While such a shortfall can come as a shock, one tax professional says the news isn’t all bad.
“It’s a shock when you’re used to getting $3,000 back and you only get $2,000 or so,” said Bryan Vincent of the Vincent Group tax preparation firm in Smiths Grove, Ky. “Yes, people are grumbling because their refunds are down. But 85 to 90 percent of the people had less withheld during the year.”
The Tax Cuts and Jobs Act of 2017, hailed by President Donald Trump and Republicans in Congress, helped businesses by lowering the corporate tax rate from 35 percent to 21 percent. It also reduced tax rates for each income bracket, doubled the standard deduction, increased the child tax credit and eliminated most other deductions.
So why the refund shrinkage?
Largely because tax withholding tables were adjusted to reflect the changes, meaning most workers had less taken out of their paychecks up front.
The Institute on Taxation and Economic Policy estimates that the middle 20 percent of income earners received an average of about $33 more per paycheck in 2018.
“Everybody’s situation is different,” said Tim Dick of Bowling Green’s Carr, Riggs CPAs and Advisors. “But I think what’s happening is that when the withholding tables were changed, people were getting a little more in their paychecks. They may then get a smaller refund check.”
As an example, Vincent said he had a client whose refund was $800 less than last year but who had $2,800 less withheld during the year.
Other factors, including caps on deductions for mortgage interest, charitable contributions and state and local tax payments, can take a bite out of refunds.
“I’ve seen that affecting quite a few people,” Dick said.
The refund sticker shock is not news to those within the federal government.
The Government Accountability Office issued a report last July warning that 3 percent fewer people would receive refunds for 2018 and more people would owe money at the end of the year.
The IRS issued multiple statements urging taxpayers to review withholding tables and determine if they needed to make adjustments.
That may be a partial solution for some taxpayers going forward, Dick said.
“Some people may want to look at their withholding and increase how much is withheld throughout the year,” he said. “Some folks want to get as close to even as possible and others want to get a refund. Taxes are so individualized.”
Reposted from https://insiderlouisville.com/government/windfall-or-shortfall-federal-tax-laws-lead-to-shrinking-refunds/