If you’re used to a big tax refund each spring, don’t make plans for this year’s refund just yet. Millions of Americans who already stated filing their taxes anticipating a refund are getting noticeably less. Some taxpayers even owe money when nothing changed in 2018.
What did change in 2018 was tax withholding. And with the new tax law eliminating or reducing many deductions in favor of a larger standard deduction, less tax was paid with less of an opportunity to write down tax obligations. Are you affected?
Here’s What Happened
When the Tax Cuts and Jobs Act became law in 2019, the IRS and the Department of Treasury updated the tax withholding tables to correspond to the new tax brackets. Most people didn’t go back to their W-4s to review or update their withholding tables; in fact, only about 20 percent of taxpayers adjusted their withholding. As a result, many people didn’t have enough taxes taken out of their paychecks during the year.
The average refund is expected to drop to $1,865 from $2,035 in 2018, and the IRS expects to issue about two percent fewer refunds overall. About five million people will be paying tax instead of receiving a refund this spring.
The IRS’s Temporary Remedy
While it’s true that the withholding tables changed, the IRS recognized that not everyone would notice and adjust their withholding properly. In normal years, the IRS issues an underpayment penalty if taxpayers don’t pay at least 90 percent of their tax obligation during the year. But because of all the changes in the tax code, the minimum threshold is lowered to 85 percent this year.
2019 withholding rules are the same as 2018. So if you think you’ll have too little taken out again, contact your CPA to adjust your withholding going forward.
What to Do
Schedule a time to review your taxes with your CPA. Now that the dust is settling on the impact of the Tax Cuts and Jobs Act, it’s time to make a plan for 2019 and beyond. Not all deductions were eliminated, and the standard deduction – though doubled – might not be the best solution for everyone.
These tax deductions are still popular and effective ways to reduce overall tax liability:
- charitable donations
- retirement plan and health savings account contributions
- mortgage interest
- student loan interest payments
- self-employment expenses
- medical costs (with a lower threshold for 2019)
- property and other state and local taxes (capped at $10,000)
The best thing to do is to file your taxes as early as possible. If you owe money, you’ll have more time to make the payment. And if you still receive a refund, you’ll get it sooner. Any tax owed is still due on April 15 even if you request a six-month extension to file the return. The IRS offers installment plans but the per-month fee for late taxes still applies.
For questions about your personal tax situation or how to adjust tax withholding in 2019 and beyond, contact Naden/Lean here or at 410-453-5500.