Did you experience a drop in your expected refund when doing your taxes this year? Many Americans did, so you're not alone. But why did this occur this year, and what should you do to avoid any surprises next year? Here are a few answers.
The Tax Cuts and Jobs Act
In late 2017, a large-scale change to federal income taxes was enacted. The Tax Cuts and Jobs Act (TCJA) altered something on just about everyone's tax forms, from the rate at which they're taxed to what can be deducted to how even the standard numbers are calculated. Because Congress put this legislation into play in December and made it effective on January 1, a lot of changes were about to happen and everyone had only a limited time to prepare for it.
Withholding Table Changes
In order to ensure that taxpayers pay into their income tax bill during the year, the IRS creates a set of withholding tax tables for payroll administrators to use. These tables indicate roughly how much each taxpayer should have withheld from their check to cover their expected taxes based on the number of exemptions claimed and their wages.
The IRS had to issue new withholding tax tables for 2019 very quickly after the TCJA was passed — meaning it had to calculate the effects of a huge number of tax law changes based on models and predictions. But some of these changes — such as the elimination of personal exemptions — had no precedent. Other effects were still being hotly debated as to how they would play out in taxpayers' real-life situations. Some of the bill's language hadn't even been clarified.
Real World Effects
As 2018 progressed, some experts were concerned that these new withholding tables may not line up with taxpayers' actual tax bills. Also, many taxpayers aren't aware that withholding guidelines are designed to achieve a "net zero" outcome, not a large refund. Between this normal function and the unknown effects of the TCJA's changes, many taxpayers did end up falling short.
Other taxpayers may not have recalculated their expected taxes to determine if they needed to make their own withholding changes.
What the Future Holds
There's no indication if Americans will see a large adjustment to the 2019 withholding tables or not. But either way, your first stop should be with a certified public accountant to discuss your 2018 outcome and 2019 expectations. A CPA at a firm like Vlasac John M & Co can help parse the changes as they apply to your circumstances. You may need to adjust your withholding for 2019, or this may be a one-time aberration. A qualified professional will help guide you to avoid any unwanted repeats.