Why Are Tax Refunds Lower This Year? Spoiler Alert: Most People Actually Owe Less Tax

Why is my tax refund smaller than last year? On social media, thousands of users are posting this question, and their concerns are well-founded — tax refunds for the 2018 tax year are smaller than tax refunds from previous years.

According to some sources, average refunds have dropped 8.7% from $2,135 to $1,949, and about a quarter of people who usually get a refund aren’t getting anything back this year. Reportedly, the government is issuing 23% less money in refunds than it has in previous years, and some analysts claim that more people will have to pay in this year.

Surprisingly, however, most people are paying less income tax. Here’s what you need to know.  

Fact — Most People Owe Less in Income Tax

Many taxpayers think smaller refunds mean their income tax bill has increased. In some cases, a smaller refund can signify a higher tax bill. However, for the most part, people are paying less income tax. According to Nicole Kaeding from the nonpartisan Tax Policy Center, 80% of taxpayers have a smaller tax bill in the wake of the Tax Cuts and Job Act (TCJA), and only about 5% owe more in tax.  

More Take-Home Pay Means Reduced Refunds

If your 2018 refund is smaller than your last tax refund, you may be wondering how that’s possible, especially if your total tax bill is lower. In most cases, this happens because your boss takes less money for income taxes out of your paycheck. In February 2019, the Internal Revenue Service (IRS) sent letters to employers advising them to take less money out of their employees’ checks for income taxes. Because of that, many workers got a slight bump in take-home pay last February.

Why Your Tax Bill Is Smaller

The TCJA ushered in a long list of changes, some big and some small. Here are some of the adjustments that are most likely to contribute to a lower tax bill:

• Increased standard deduction — for married filing jointly taxpayers, the standard deduction increased from $12,700 to $24,000, and for single filers, the deduction went from $6,350 to $12,000.
• The child tax credit increased from $1,000 to $2,000 per child.
• Up to $1,400 of the child tax credit become refundable under the new tax law.
• Income limits concerning the child tax credit increased, allowing couples filing jointly to earn up to $400,000 and still claim this credit — in the past, the tax credit started to phase out at income levels over $110,000 for couples.
• A qualified business income credit became available to many freelancers and sole proprietors with pass-through income.

Why Your Tax Bill Is Bigger

In rare cases, some people are paying more income tax under the new laws than they did previously. Some of the changes that can trigger a higher tax bill include the following:

• Elimination of a $4,100 personal exemption which helped to reduce taxable income for many filers in the past.
• A new $10,000 limit on state and local tax (SALT) deductions — this change primarily affects people who live in states or communities with high-income tax levels and/or who live in homes valued over $300,000. For example, in the past, if you claimed a $20,000 deduction for state income tax and a $15,000 deduction for property tax, you had a $35,000 total deduction, but now, you can only deduct $10,000.  
• Taxpayers with significant itemized deductions who don’t benefit from the increased standard deduction
• Taxpayers with a lot of unreimbursed business expenses — in the past, you could deduct amounts for qualifying expenses that exceeded 2% of your adjusted gross income, but as of 2018, that deduction is no longer available.

What to Do If You Owed Income Tax for 2018

In some cases, taxpayers ended up with a surprise bill. If you owed money with your 2018 tax return, you could avoid that in 2019 by asking your employer if you can fill out a new W-4. A W-4 is the form where you mark your deductions, so your employer takes out the right amount of money every month. If you’re self-employed, you might want to talk with an accountant to ensure you’re making quarterly payments accurately.

Got a tax bill you can’t afford to pay? Don’t worry. The IRS has lots of different options, and we can help you negotiate a payment plan, a settlement, or the right resolution for your situation. To get help, contact us for a free consultation today.