Tax Cuts vs. Refunds Blog

You’ve started receiving the envelopes in the mail stating “IMPORTANT TAX INFORMATION ENCLOSED” and are getting ready to file your taxes for 2018.  Thanks to the new tax laws, you might even be expecting to receive a larger refund this year.  While you likely paid less in taxes this year, that may not translate into a higher refund.  In fact, as recently reported by the Wall St. Journal, your refund might be less than in previous years. 

This caught our eyes – and it’s something worth expanding on.  We spoke with Brighton Securities’ Tax Manager and CPA, Dave Manioci to learn more about what you can expect when filing your 2018 tax return.

Q:  It looks like people are going to file their taxes this year expecting a larger refund due to what they’ve heard about the new tax laws.  It may not be that simple though, can you explain what this means with regards to a tax cut being different than a tax refund?

A:  We prepared the estimates for about 60 clients, and for 80 to 85% of them, the actual taxes went down by what the government thought they would – about $1,500 to $2,000 each.  The problem is that withholdings went down by even more than that, so many weren’t getting the anticipated refund.  A lot of people may be looking at this thinking, “they said my taxes were going to go down by $2,000 to $2,500, I got a refund last year of $1,500 so I should get $4,000 back this year.”  That’s not the case, because their withholding went down by $4,000, some of these returns are now breaking even. 

Q:  So, the change was in the amount withheld from people’s paychecks, not necessarily the refund they’ll get when they file?  What is the difference between withholding and refunds?

A:  They’re totally separate things.  Your refund is the difference between your tax liability to the IRS, and the amount you’ve already had withheld from your paychecks.  Your actual tax liability is based on your income, deductions, etc.  For the most part, taxes went down.  Your tax liability may have gone from $10,000 to $8,000.  That’s great – you lowered your tax liability by $2,000.  The problem is, your withholding went from $14,000 to $10,000 (this is an example).  So, in the past, you had $14,000 withheld, and a $10,000 tax liability, you received a $4,000 refund.  For 2018, you had a tax liability of $8,000, a decrease from the past year.  But the amount you had withheld likely went from $14,000 to $10,000, so you’d only receive a refund of $2,000.

Q:  This sounds like something that is going to be a surprise for a lot of folks in the next couple of months…

A:  Definitely.  Everything we’ve heard is, your taxes are going down, so you think you’ll get more money back.  This is true, you’re getting more money back, but you got it from February through December of 2018 instead of in a lump sum when filing your return.

Q:  It seems as if the government hasn’t done a great job of communicating that to the public.

A:  That’s probably true.  The other issue is that for the most part, people left their withholding tables the same for years and years.  With tax law changes, a lot people went and changed their withholding from what it had been to something different.  A lot of people really have gotten big bumps in their take home pay due to less withholding each paycheck.   Based on that, the refund they receive vs. what they might have anticipated may be less. 

Q:  Can you explain what the change in withholding means?  Would the percentage of taxes withheld for each designation such as Single 0 or Married 1 have changed?

A:   Yes.  For someone receiving a consistent salary and being paid regularly, they should have seen an increase in their take-home pay, meaning less taxes were withheld.

Q:  Even if they did not make any changes to their withholding?

A:  Yes, you still should have seen an increase in your take-home pay.  The IRS should have done a better job of communicating that. 

Q:  Do you anticipate people receiving a refund that is less than anticipated based on these changes?

A:  In many cases, yes.  In the ones we’ve done so far, the refunds have been less than anticipated even though the actual amount of taxes they paid was less.

Q:  What advice would you have for someone who’s used to a refund and would prefer to receive that instead of a few dollars extra each paycheck?

A:  The best thing to do in that case would be to change your withholding status now for the rest of 2019 to have more taxes withheld so you should see a larger refund at this time next year.

The Wade Group