Tax Tip of the Week | Was Your Tax Refund What You Wanted?

Many taxpayers were surprised this year by the amount of their tax refund or their tax balance due. Most refunds were less than the prior year and those who typically owe money, owed more. There were also those people who normally received a refund who were now dismayed to discover a balance due. Even tax preparers were surprised to the extent of these tax refund reductions or additional amounts due. Yes, multiple warnings were issued by the “Chicken Littles” during the year. Well, these “Chicken Littles” turned out to be correct. The new 2018 withholding tables not only gave you an early refund from the new tax law BUT some “extra.” This “extra” is what reduced your withholdings which lead to the nasty tax return surprises. Adding insult to injury, your 2019 refunds (or balances due) may be even worse since the new 2018 withholding tables were not for a full year. They may have started as late as February 15, 2018 (and I am sure some employers began later than that.) So, if you want your bottom line on your tax return to look like times of old – better increase your withholding now.

The below WSJ article published April 13-14, 2019 by Laura Saunders further explains this situation along with some possible remedies.  

                                                          -    Mark Bradstreet

Congratulations American taxpayers, you made it through the first filing season after the largest tax overhaul in a generation. Now do yourself a favor and check your withholding.

For weeks, news articles, message boards, and family dinners have been filled with unhappy taxpayers lamenting tax-refund shortfalls or surprise bills. For many, that’s because they didn’t watch their withholding.

Among them is Alaric DeArment, a 36-year-old biotechnology journalist in New York City.

He got a tax cut from the overhaul, as did two-thirds of American households. For 2018, his federal bill is $2,400 lower than in 2017. But his tax cut didn’t feel like one, he says, because he didn’t know that last year the Treasury Department lowered paycheck withholding for millions of workers in order to speed up delivery of the tax cuts.

So, his customary tax refund of between $1,000 and $3,000 became a surprise tax bill of $785 this year. As a result, Mr. DeArment can’t use a refund to help pay for a trip to Eastern Europe or a new laptop, as he planned. Instead, he’s paying his tax due in installments.

“It’s horrible, a bummer,” he says. He says he’ll change his withholding soon.

So far, about 1.2 million fewer filers are getting refunds compared with last year, according to the latest data from the Internal Revenue Service. Total refunds are down by about $5.8 billion, or 2.6%. The average refund is $2,833, down $31 from this time last year.

This data doesn’t measure the number of filers who have gotten unwelcome surprises this year, such as a lower refund or higher payment due, because of the withholding changes.

Tax preparers say there are many. Don Rosenberg, an enrolled agent in Yorktown Heights, N.Y., says that despite the overall tax cuts, 75% of his clients are unhappy with their tax results this year, many of them because of withholding changes.

“Anybody who says refund size doesn’t matter should sit in my office for a week,” he says.

The emotional response to tax refunds or bills has a logic of its own. People often use tax refunds to help with big purchases, although it means they’ve made an interest-free loan to Uncle Sam by letting the government have more of their money during the year.

The bottom line: If you’re upset by this year’s refund or tax bill, consider changing your withholding to prevent a rerun next year.

Tax specialists at H&R Block, which prepares 20 million returns a year, warn that many filers with smaller refunds this year are set for even lower ones for 2019, because Treasury’s withholding changes will be in effect for the full year. The average refund for this group will be $200 lower next year without adjustments to withholding, based on analysis of their clients.

In addition, the IRS approved broad waivers of penalties on 2018 underpayments. These likely won’t be extended for 2019, and most filers need to pay 90% of what they owe during the year to avoid penalties. Here’s more information about changing your withholding.

Know the options. You can consult a tax preparer, but there are ways to do it yourself. The simplest is to take the additional total amount you want withheld, based on this year’s outcome, and divide it by remaining paychecks. Then put that on the IRS’s Form W-4 and give it to your employer.

You can also recalculate your withholding using the W-4 form, but this can be confusing. The IRS hasn’t finished a redesign following the overhaul, and a proposal released last year proved controversial because it asked workers to share private information with employers. An update is due soon.

You can also use an IRS calculator to figure what you’ll owe for 2019. It allows inputs for more than one earner, investment income and more. Users need their most recent tax return plus recent pay stubs and perhaps other information.

Make good use of paycheck withholding. Do you have nonwage income, as from outside gigs or investments? To avoid penalties, you may need to pay quarterly taxes on this income. If so, it often makes sense to increase paycheck withholding instead, as it’s not subject to the same timing requirements as quarterly payments. 

For example, taxes on nonwage earnings from the first quarter are due April 15 in order to avoid penalties. But if the same taxes are paid through increased withholding in November, there are often no penalties.

Pay attention to pensions. Withholding was lowered for pension payments as well as for paychecks. If you want to raise it, use Form W-4P.

Beware of bonuses. The tax overhaul cut the withholding on bonuses from 25% to 22%, so that can contribute to lower refunds or higher tax bills. Employers will withhold more if requested.

Credit given to Laura Saunders. Write to Laura Saunders at laura.saunders@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration.  

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This Week's Author - Mark Bradstreet, CPA

--until next week.