Don’t Count On A Tax Refund Next April

Have you checked your 2018 federal income tax withholding? Because of the new tax law passed last December, millions more taxpayers than usual won’t get tax refunds next April; instead, they’ll have a tax bill when they file their federal income tax returns. That’s according to a Treasury Department simulation in a new report from the Government Accountability Office.

Senator Ron Wyden (D-OR), who along with Senator Richard Neal (D-MA) requested the GAO research, sent out an alarmist tweet: “This is an alarm bell for the nearly 30 million households that are expected to owe MORE money come tax time this spring.”

The simulation shows that only 6% of taxpayers will have wages with accurately withheld taxes (within $100 of the amount due), while 21% of taxpayers (nearly 30 million) will be underwithheld, meaning they will have a balance due, and 73% of taxpayers will be overwithheld, meaning they will get a refund. If the tax laws hadn’t changed, 18% would be underwithheld, and 76% would be overwithheld.

What’s the danger of being underwithheld? You have to come up with the money to pay next April, plus you might be subject to penalties. Generally, about three quarters of wage-earning taxpayers are overwithheld. In the last tax season, the Internal Revenue Service processed more than 135 million individual tax returns and issued refunds for over 102 million (about 75%). The average refund was $2,778.

Who needs to pay attention? Dual-income, large families, gig economy workers and folks who have been itemizing deductions. The report gives a couple of examples.

A hypothetical family with two children under 17 and one job paying $75,000, taking the standard deduction, would be substantially more overwithheld than under prior law (by nearly 200%). They’ll get a tax refund next April but could be making better use of their money than essentially loaning it to the federal government.

A family with two children under 17 and one job paying $180,000, $20,000 of non-wage income, itemizing deductions, would be underwithheld. They hopefully have enough savings to deal with the higher-than-expected tax bill next April.

The GAO notes that the IRS has been trying to get the word out to taxpayers that they may need to do a paycheck checkup. Forbes’ Kelly Phillips Erb explains how the new IRS withholding calculator works in If You Itemized Your Deductions, It’s Time For A Checkup On Your Taxes.

But in a footnote, the GAO report notes that in certain situations, the calculator results lead taxpayers to unknowingly have more tax withhold from their pay than is necessary. (For example, many taxpayers are paid biweekly, 26 times a year, while the calculator assumes 25 pay periods to determine the withholding amount.)

Another problem with the calculator: Taxpayers seem to abandon it along the way. The report found that the step when most taxpayers gave up was the step that requires entering paystub information. At least, way more people are trying to use the calculator than in past years.

The GAO recommended that the Treasury and the IRS should document their roles in updating the withholding tables, given the importance of withholding to taxpayers’ pocketbooks. The Treasury and the IRS have agreed to do so.

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