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TAX TIPS
The U.S. Cut Taxes.
Why Will Fewer
Folks Get Refunds?
BY JOHN SAVIGNANO, CPA
U.S. taxpayers are filing their first returns under the 2017 tax code overhaul that lowered rates for most
people. What makes the paperwork headaches tolerable for many is the promise of a tax refund at the finish
line. Yet more taxpayers will end up with no refund, or a smaller one, compared with a year ago, before the
lower rates fully took effect. How could that be? The explanation rests with the many other changes that made
it into the revised tax code. Some Americans are venting their surprise and anger.
1. What were the other changes?
The overhaul pushed through by Trump’s fellow Republicans in Congress did much more than lower rates
for individuals and companies. It also eliminated some valuable tax breaks used by taxpayers to trim their
bills, enhanced a tax credit bestowed on families with children and created brand-new benefits for certain
taxpayers, such as business owners. Many people who live in high tax states, such as New York, New Jersey
and California, will be able to write off only a fraction of what they pay in state and local taxes. Someone who
travels frequently for work, but doesn’t have mileage covered, could owe more in taxes because there’s no
longer a deduction for non-reimbursed business expenses.
2. Then why aren’t there lots more refunds?
The Internal Revenue Service offers ongoing guidance to help employees and employers decide how much
money to withhold from paychecks so that most income taxes are paid automatically and gradually throughout
the year. The shifting tax brackets -- they now start at 10 percent and top out at 37 percent for income
about $500,000 -- plus changes to exemptions, deductions and credits meant that many taxpayers needed to
adjust their withholding. But most taxpayers were confused how to do so.
3. What’s the outlook for tax refunds?
The IRS expects to issue 105.8 million refunds this year, down 2 percent from last year’s 108.3 million.
According to Ernie Tedeschi, a former Treasury Department economist who analyzed the topic for research
firm Evercore ISI, many taxpayers with incomes below $100,000 will get their tax cut in the form of a bigger
refund, while those with higher incomes got the tax cut in the form of higher paychecks throughout 2018 --
and therefore might be expecting refunds that aren’t coming. Analysts anticipate the total dollar amount
refunded to be slightly higher, meaning some people will get bigger refunds than in the past. Among them are
couples with children, since the standard deductions for filing as a couple, as well as the child tax credit, both
almost doubled in the revised tax code.
4. Who won’t be getting a refund at all?
More than 30 million Americans -- 21 percent of taxpayers -- didn’t have enough taken out of their
paychecks throughout the year, meaning they will owe the IRS will they file their returns this year, according
to a study from the Government Accountability Office. That’s an increase from 18 percent of taxpayers who
were under-withheld last year. That means about 5 million people who got a refund last year won’t be getting
one this year.
5. What does this mean for consumer spending?
Despite fewer tax refunds overall, Wall Street analysts are expecting to see a boost in spending from the
lower-income consumers who will benefit from the expansion of the child tax credit. Middle-income
households, those earning from $55,000 to $75,000 a year, will also see benefits, with as much as half of their
tax-cut bounty showing up in refunds, Wells Fargo said. The tax-cut sugar high could be short lived, however,
the Congressional Budget Office said the effects of the tax cuts are set to wane in the coming quarters.
6. What are the political ramifications of this?
Fewer people getting refunds will give U.S. Democrats, who now hold a majority in the House of
Representatives, an opening to question how much the tax law benefited the middle class. Only about 45
percent of voters approve of the tax cut, according to recent polls, and many Republicans in high-tax states
already lost their seats in the 2018 midterm elections due to the changes in the deductibility of state and local
taxes. Looking ahead to the 2020 presidential election, dissatisfaction with the tax law gives Democrats an
opening to promise tax changes of their own, ones that favor the middle class at the expense of the wealthy.
IRS Won't Penalize Confused Taxpayers Following Changes to Code
Taxpayers who miscalculated how much they’ll owe the Internal Revenue Service this year won’t get hit
with penalties -- up to a certain point.
The Treasury Department said Wednesday it won’t penalize individuals who underpaid their estimated
taxes for 2018, as long as they paid 85 percent of what they owe through withholding or estimated quarterly
payments.
The 2017 tax overhaul changed the tax brackets, expanded the child tax credit and nearly doubled the
standard deduction to $24,000 for a married couple -- all changes that affect how much an individual will owe
in taxes this year. This is the first filing season individuals are paying taxes under the new rules.
Salaried workers have their taxes withheld from their paychecks. Business owners and self-employed
people pay estimated taxes to the IRS quarterly. Those who still owe taxes will have to pay the IRS the
additional tax they owe by April 15, the tax filing deadline, or file for a six-month extension.
The announcement comes after the top Republican and Democrat on the Senate Finance Committee,
Chuck Grassley and Ron Wyden, urged the agency to be lenient with penalties as taxpayers adapt to the
changes stemming from the tax overhaul.
Moments before Treasury’s announcement, Grassley took to the Senate floor to urge the IRS and Treasury
to provide relief to taxpayers but to also include guardrails to prevent abuse. “The IRS should consider what
action the agency can take to provide penalty relief,” Grassley said. “But the issue of under withholding due to
the passage of tax reform should not be exaggerated.”
John Savignano is a partner with Savignano Accountants & Advisors located at 47-46 Vernon Blvd., Second
Floor, in Long Island City. If you have any questions or require additional information, please call John at
718-707-0955.
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