One of the big issues that has been in the news lately is decreased refunds or even some tax payers finding out that they have a balance due. The new 2018 tax laws brought some of the biggest changes to the tax code in recent memory and we are just now starting to see the effects as clients start to file their returns. According to current data, on average, tax refunds for the year are down 8.7% compared to previous years. It is still early in the filing season, but we believe that that number will probably hold true.
One of the biggest misunderstandings is that overall, the tax rates have been lowered and we are seeing people paying less tax on the same amount of income compared to previous years. However, along with the tax code released last year, withholding tables were also updated in February. What we then had was a mad scramble for payroll companies and employers to update their withholding tables, and in most cases lowered the amount of taxes being withheld from an employee’s paycheck.
One of the IRS’ goals with the new withholding tables was to limit the large overpayments or underpayments, hoping that the withholding would end up being very close to the actual tax due. For some clients that has meant that their refunds have gone down, but they still paid less tax. Maybe not the result that they were looking for, but still at the end of the year they paid less tax. In some cases, we have seen the withholdings tables adjusted too much and clients are actually owing tax at the end of the year. This is something that we rarely saw in the past and could be a brutal surprise for some people already, or in the next couple months. While these tax payers still most likely are paying less taxes, the balance due is not an anticipated expense and is causing some headaches.
In general, we found that most clients that were not self employed had a pretty similar tax picture from 2017 to 2018. Some had tax due go up slightly because of the changes, some had tax due go down, but overall fairly constant. On the bright side, almost all of the self-employed clients we have are seeing a decrease in tax due, and sometimes it is a significant decrease.
Despite that IRS push, the tax code has not been made simpler – if anything the complete opposite. This is a great real life example of where tax planning throughout the year could not only reduce surprises like this, but also provide an opportunity for tax planning and minimization.
If you have any questions, please do not hesitate to Contact Us. 866-383-4948.