LIMA — Those who filed their taxes early have likely encountered an unwelcome surprise: A lower-than-expected refund, or even an unexpected tax bill.
Refunds are about 8.7 percent smaller than they were this time last year, according to IRS data for the first two weeks of the 2018 tax season. That may change as more people file. But the smaller refunds may come as a surprise for those who believed tax reform would increase the size of their refund.
Why are refunds lower?
Fewer people are itemizing, which may result in a lower refund for those who had itemized in the past.
The tax law also changed withholding tables, so people saw more money in their paychecks but some employers withheld too little.
“They kept encouraging people to do a paycheck update, and very few people did,” said Cheryl Lawson, owner and CPA with Lawson Tax & Accounting Services on Lima’s Allentown Road. “The idea was they’re going to put more money in people’s pocket. But now they’re seeing they put too much money in people’s pocket, and people are owing.”
A December 2018 survey from H&R Block found that few respondents – only 46 percent — felt prepared to update their W-4s on their own. In a separate survey, H&R Block found that 47 percent of respondents were expecting a larger than average tax refund this year because of tax reform.
“While most people will come out ahead overall, it won’t feel that way for the people who will get a smaller tax refund, or will end up owing, because they got their tax reform benefit through bigger paychecks,” said Kathy Pickering, vice president of regulatory affairs and executive director of The Tax Institute at H&R Block, in a statement when the analysis was released.
Smaller refund, more taxes?
In short, no. Nancy Rumschlag, owner of the Liberty Tax Service franchise in Lima, said most of her clients paid fewer taxes in 2018, even though some of those same clients are now receiving smaller refunds.
Rumschlag estimated that the average client may receive $500 less this year than they did with their 2017 returns. But she noted that the overall tax liability for those same clients fell anywhere from $700 to a couple thousand dollars.
“The majority have seen so far that the liability is lower,” she said. “That’s a savings to the taxpayers.”
The Tax Foundation found the average tax cut for a person in this region making $36,000 is about $839, or 2.3 percent of that person’s income. That tax cut falls to $254 on average for a person making $17,000. But a person making $60,000 would save an average $1,476 under the same calculations.
Some refunds grow
Not everyone is receiving a lower-than-expected refund, either.
Taxpayers with children younger than 17 years-old are typically faring better under the new tax law, thanks to an increase in the child tax credit, which doubled to up to $2,000 per child.
“Those people are typically seeing a higher refund, or at least similar,” Lawson said.
And people who do not own a home likely benefit from a higher standard deduction, which doubled to $24,000 for married couples and $12,000 for singles. Taxpayers who rent a home or apartment typically did not qualify to itemize in the past and are more likely to benefit from the new standard deductions, said Clarissa Rand, a tax professional with Jackson Hewitt.
“They’re going to be better off because they didn’t own their home, and they’re going to get this huge standard deduction,” Rand said. “That’s great for them. They’ve never been able to itemize because they didn’t own their home.”
She noted that 80 percent of itemizers own their own home and can claim a deduction for home mortgage interest.
Rand said the higher standard deduction is the most “significant” change taxpayers will see this year. But she noted that 1040 forms are more complex, a result she attributed to the forms being made smaller.
“Imagine you having a crossword puzzle on one sheet, but in order to complete it you had to complete a page behind it before you could go back and complete the first page,” she explained. “Now all the guts of it (are) cut out, you don’t see all of the calculations. Activity is in the supporting pages in the back. In my opinion, it’s much easier to make mistakes.”
Reach Mackenzi Klemann at 567-242-0456.