It’s tax day. Do you know what your refund is up to?
Conor Barnes, an accountant in New York, decided to stop telling her clients to “have a nice day” at the end of their meetings. Often she delivered news that had, in fact, ruined their day: They owed the government money, sometimes a painfully large amount.
The overhaul of the tax code — the first in three decades — caused much confusion this tax season, which was only worsened by the monthlong government shutdown. Many taxpayers were upset when they found out that they owed money to the federal government, even if their tax burden was lower.
And if taxpayers do not adjust their paycheck withholdings, next year could bring an even bigger shock.
“If they don’t go out and make a change now, they will have even less withheld in 2019, so their situation will just get worse,” said Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute.
How did it happen? New guidance from the Internal Revenue Service prompted employers to adjust workers’ paychecks in March 2018 in an attempt to match up what they would owe under the new tax plan. And in some cases — if taxpayers didn’t update the relevant withholding forms — they ended up owing money, even if their total tax liability dropped.
“Clients intellectually understand it when you explain it to them,” Barnes said, “but it is emotionally challenging.”
The updated tables were in effect for about nine months last year. But this year, they will be in effect for all 12, meaning the problem will be magnified if taxpayers do not take action — and soon.
Withholdings are updated by filling out IRS form W-4 and giving it to your human resources department, or whoever handles payroll. It is an eye-glazing task, which may be why nearly 80 percent of filers, according to H&R Block, failed to update last year.
“Most people were taking a wait-and-see approach, as no one is dying to increase withholdings,” said Debra Taylor, an accountant and financial adviser in Franklin Lakes, New Jersey. “It was difficult to generalize how the new law would affect taxpayers as everyone’s situation was truly different.”
If a family was able to take the child tax credit or new qualified business income deduction, they might not have ended up owing anything, even if they could no longer deduct their state and local income taxes, Taylor said. But if they did not receive benefits from some of the newer tax breaks, “then they could be losing all the way around. Hence the high level of frustration and surprise among folks.”
Early this tax season, IRS statistics showed that the average taxpayer refund was down nearly 17 percent. Things have evened out since then: As of April 5, the average refund was $2,833, down 1.1 percent from last year.
But that is not the whole story: A million fewer taxpayers had received refunds.
Averages also gloss over what was happening in individual households across the country. In New Jersey, for example, H&R Block found that, on average, its clients owed about 30 percent less in taxes than in 2017. But their refunds declined by about 6 percent, according to an analysis among customers who filed through the end of March.
Overall, H&R Block said that its average taxpayer’s total liability dropped by $1,200, while refunds were up $43. Instead of substantially bigger refunds, those taxpayers received about $50 more in their biweekly paychecks starting in March 2018, for a total of $1,156 — which they may not have even noticed.