The average tax refund amount is down as much as 16% from the tax season in 2018, and the Internal Revenue Service estimates that about 30 million people or 21% of taxpayers will owe money to the IRS. There are several reasons for reduced returns and the underpayment of taxes. Find out more about a few of the effects of the 2017 Tax Cuts and Jobs Act on taxpayers in 2019.
1. Reduced Withholding
The reason why many taxpayers are receiving smaller amounts in refunds is due to reduced withholding from paychecks throughout the year. Unless a taxpayer submitted an updated W-4 or accounted for the difference between previous amounts withheld for tax purposes and the amount withheld in 2018, he or she may receive a smaller refund or end up owing money to the IRS.
In previous years, taxpayers tended to overpay the IRS and get money back in the form of a tax refund. Recent tax reforms lowered the amount withheld by default, which led to many taxpayers receiving paychecks that were slightly higher. An IRS spokesperson informed the National Public Radio-affiliated radio station WBUR in Boston that about a quarter of taxpayers who typically receive refunds will not be eligible this year, and more people may owe money to the IRS.
A W-4 allows individuals to customize withholding amounts. Filing this document can help taxpayers keep track of the exact amounts withheld from paychecks to avoid unexpectedly low refund amounts or owing money during tax season. It is also important to file an updated W-4 after receiving a raise.
2. Loss of Personal Exemption
In previous years, some filers lowered their taxable income by claiming a personal exemption. The Tax Cuts and Jobs Act eliminated the personal exemption and almost doubled the standard deduction. This adjustment has offset the potential penalties of this change for some taxpayers, but may result in higher taxes for others.
In previous years, all taxpayers who could not potentially be claimed as dependents and did not have a high adjusted gross income had the option to claim a personal exemption. This $4,050 exemption could be claimed on a per-person basis to lower taxable income. The loss of the personal exemption may have the most drastic effects on taxpayers with large families and dependent children who are too old to be eligible for the Child Tax Credit, as well as college students.
3. Cap on SALT Deductions
The revised tax code limits the deduction of state and local taxes, including taxes on property, sales taxes and income tax to $10,000. There was previously no limit on these deductions. Taxpayers who choose to itemize deductions will claim SALT deductions rather than the standard deduction, which is now $12,000 for single filers and $24,000 for married couples filing jointly.
The $10,000 limit on SALT deductions may disproportionately affect filers with high incomes, as well as property owners and residents of states with higher income taxes and property values. Any taxpayer who opts to itemize taxes rather than taking the standard deduction can deduct property taxes, but it will be necessary to choose between deducting income tax or sales tax. Residents of states with higher income tax may choose to deduct state and local taxes, whereas residents of states with low or no income tax can itemize and deduct high sales tax.
4. Elimination or Limitation of Itemized Deductions
The Tax Cuts and Jobs Act has also eliminated or introduced limits on a number of itemized deductions. It is no longer possible for taxpayers to deduct expenses on moves over 50 miles or miscellaneous expenses including tax preparation fees, investment advisory fees and expenses, depreciation of devices required for work or unreimbursed job search and work expenses. Other deductions have new requirements or limits that may ultimately affect refund amounts.
New homeowners can only deduct interest for up to $750,000 in debt rather than $1 million. This change does not apply to holders of mortgages that predate 2018. Home equity loan interest is not deductible, unless this loan is used to finance substantial improvements in compliance with the debt limit.
Medical expenses that total more than 7.5 percent of adjusted gross income are still deductible this year, though this percentage will be increased to 10 percent in 2019. Alimony is no longer deductible for payees, but recipients no longer have to pay taxes on this income. Charitable gifts of cash are now deductible up to 60 percent of adjusted gross income, which is an increase from 50 percent in 2017.
5. Personal Circumstances
Taxpayers may also receive smaller refunds on account of changes in their filing status or circumstances. The income bracket of a household may change if a single filer gets married and starts filing jointly with his or her spouse. The addition, decrease or adjustment of dependents can also impact refunds. The Child Tax Credit has been doubled to $2,000, but as soon as a child turns 17, their parents can only claim a $500 Credit for Other Dependents.
Other factors that are related to deductions and exemptions can also impact refund amounts. Some taxpayers may no longer be eligible for education credits or may choose to claim credits that end up lowering their refund. A refund may also decrease if a filer finishes paying off a mortgage or student loan and can no longer deduct the interest. Taxpayers who have begun receiving Social Security benefits or distributions from a Roth IRA may also see the effects of this change in income when it comes to refunds. A refund may also be affected by contributions or a lack of contribution to a non-taxable traditional IRA.
Any of these factors may result in a taxpayer receiving a lower tax refund amount this year. If this is the case, you can remedy this situation in the future by filing an updated W-4 to adjust withholding levels or keeping track of withheld amounts throughout the year in preparation for tax season.
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