With the 2019 tax filing season underway, one thing has become abundantly clear; the average tax refund is smaller. The newest round of tax reform rule changes are hitting some people right in the bank account, and leaving many filers surprised. However, tax filers themselves can also be responsible for part of the drop. If you have filed and are now wondering “why is my refund so low,” here are some potential reasons.
The Tax Cuts and Jobs Act
In 2018, the Tax Cuts and Jobs Act took effect. The IRS adjusted all of the tax withholding tables which determine how much is withheld for income taxes from employee paychecks. Plus, certain itemized deduction options were changed or eliminated, and the standard also shifted.
Ultimately, the legislation was a massive overhaul of the tax code, and most weren’t sure exactly what their refund would look like until they filed. Since the new withholding tables caused many workers to have less withheld from their paychecks, something that benefited them throughout the year, their refunds ended up smaller.
Additionally, some deductions were limited or eliminated. For instance, the state and local tax deduction was capped at $10,000 for the 2018 tax year. As a result, those who spent more in state and local taxes couldn’t deduct any amount over the $10,000 limit.
Unreimbursed employee business expenses used to be deductible. But, after the Tax Cuts and Jobs Act, that isn’t an option. Changes to the child tax credits also negatively impacted some households.
Not Updating Your W-4
Withholding tables aren’t the only thing that determines the amount withheld for income taxes. What you list on your W-4 also plays a role.
When you claim exemptions, you are reducing the amount that is withheld based on a specific formula. Depending on how you completed your last W-4, it may not have been appropriate for your situation once the new laws came into effect.
For example, those who received substantial pay increases might not have adjusted their W-4’s to compensate for the additional pay and how the tax code updates impacted their tax rate. As a result, they underpaid, leaving them owing taxes instead of receiving refunds.
Similarly, if you previously had a dependent child reflected on your W-4, but that child didn’t qualify as a dependent this year, you might not have contributed enough in taxes. Unless you actively update your W-4, your employer won’t know that your situation has changed, so they can only update your withholding if you complete a new form and submit it to your payroll department.
Precisely why your tax refund is smaller depends on your unique circumstances. However, any of the factors above could have played a role. If you want a clearer picture based on your situation, speaking with a tax professional might be a smart move.
A Smaller Refund Isn’t Necessarily a Bad Thing
While many people count on their refunds for making large purchases, paying off debt, or similar activities, getting a smaller refund isn’t inherently a bad thing. When you get money back from the IRS, that means you overpaid. When your refund is more modest, you are getting more of your income in each paycheck, giving you the ability to relax your budget, increase your savings, or otherwise benefit from the additional cash.
Ideally, you want to try and break even when you file your taxes. When you don’t owe the IRS, and they don’t owe you, you maintain proper control over the portion of your income that doesn’t have to go to taxes.
When you over-withhold, you are missing out on an opportunity. The IRS doesn’t pay interest on the money you send, even when you give them too much. If that money were in your savings account instead, for example, you’d earn interest during the year, which is a much smarter financial way to go than getting a refund check from the IRS.
Was your tax refund smaller this year? Share your thoughts in the comments below.
Read More:
- Your Unpaid Student Loan Could Cost You Your Tax Refund
- Are You Missing Out on Your Earned Income Tax Credit?
- What You Should Know About the New 1040 Form
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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