Smaller Tax Refund This Year?

Refund Data

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, enacted a number of broad changes: It introduced new tax brackets, included an expanded child care credit and changed the way itemized deductions are factored in, etc.

As some Americans are already discovering, certain people will be more affected by tax reform than others, and not all the surprises are pleasant ones.

For the week ending Feb. 1, 2019, IRS data shows the agency received 16.04 million individual tax returns, down 12.4% from the previous year, with an average refund being issued of $1,865. That’s down 8.4% from the $2,035 average refund issued at the same time last year. On the surface, this data makes it appear that the TCJA has pulled the wool over the eyes of the average American taxpayer, who is now taking home less than he or she was last year. But you have to do some digging to get to the truth of why refunds have declined. 

If you normally make some big purchases with your tax refund, or use it toward a summer vacation, you may want wait to learn how much you’ll be getting back before you make any plans this year.

Why are Refunds Down this Year

Last July, the General Accountability Office (GAO) issued a 26-page report regarding individual and employer responsibilities with regard to tax withholding. Employers are required to withhold a certain percentage of your income, but workers also have the ability to modify their federal tax withholding by adjusting their W-4.

The problem, as described by the GAO, is that the TCJA made a number of changes to the tax code that, when combined with data limitations for the U.S. Treasury when crafting tax-withholding guidelines for 2018, led to more under-withholding and less over-withholding. Basically, this just means less money is being taken out of workers’ paychecks under the new Treasury model being implemented by employers, leading to smaller end-of-year refunds, and some folks actually owing money who had never owed before. That and workers not fully understanding these changes, meant few knew how to accurately adjust their tax withholding in 2018.

Under the previous tax code, about 75% of taxpayers were receiving a refund, but early data from the IRS shows that while returns received are down 12.4%, total refund issued has fallen by nearly twice as much (24.3%). In the view of the Treasury, the new system in which fewer people receive a refund is more balanced than the previous tax system.

Who’s Affected the Most

Here’s who’s most at risk for a lower refund this year:

• Those who did not adjust their withholding rates
• Those with large salaries in states with high taxes
• Those with work expenses they usually write off

Is this Good or Bad

You’ll be getting more of your money upfront, rather than offering the federal government an interest-free loan for possibly more than a year.

There’s been an incorrect belief among taxpayers that receiving a refund is a good thing. Unless you’re living without a budget and have absolutely no self-control with discretionary income, a tax refund (i.e., over-withholding) is a bad thing (if it’s not from refundable credits). If you were receiving a larger weekly, biweekly, or monthly paycheck, you could put your money to work now, rather than waiting more than a year to do so.

For example, receiving a higher paycheck now as a result of withholding changes under the TCJA could help consumers tackle a record amount of outstanding consumer debt. Instead of waiting months or longer to collect a large refund to apply to your outstanding debts, you could use the added income in each of your paychecks now to reduce your principal before interest has an opportunity to build on what you already owe.

Getting more of your earned income up front also means the possibility of putting this money to work in an emergency fund or invest it to earn you more money.

What to Do if You’re Worried