The problem of not receiving your expected annual tax refund does not apply to everyone. But you may not be aware that this year it applies to you. The tax reform bill that put hundreds or even thousands of dollars more in your paycheck every month potentially has a future impact on this year’s federal tax return. In order to achieve the goal of padding your weekly or biweekly paychecks, the government created new withholding tables your employer were required to use. Those tables, which are the basis for not only how much the government takes but also what is stashed away for that planned annual windfall, can be disappointing to you if you planned on using that money for this year’s vacation or another major expense.
Some people might see this as a Trump administration or IRS sleight of hand, where the advertised tax reduction was only moving money around from one place to another (your annual refund to your monthly checks) but the reality is that the perceived trickery will be different depending on how your financial year went.
For example, if you got a large raise or bonus last year, between the lower tax rates and the new withholding tables you may think you seriously hit the jackpot. But the reality is the best you may be able to do is break even after calculating your taxes. If you cashed in a certificate of deposit you may find yourself owing money. Or if you are used to deducting the state income tax you pay from your federal return you may discover you will take a hit because the new tax law no longer allows that deduction. This affects taxpayers in states such as New York and California that have high state income tax rates.
So how did this happen? The 2018 standard deduction went from $12,740 for married couples in 2017 to $24,000 in 2018. But the individual personal tax exemption of $4,050 per person was eliminated. The simple math is that if you are married with one child, the $11,300 increase in the standard deduction was basically cancelled out by the loss of $12,150 for three personal exemptions. Of course, this is a very crude way of doing the math since the complete set of changes to the tax law is far more complicated, but this gives you an idea of what might have happened to your refund largess.
Take someone who ends up going through the tax tables from 2017 and 2018. In 2017 a married couple filing jointly with a total adjusted gross income of $37,000 would have paid in $4,614 in taxes. Looking at the 2018 tax tables that same couple with the same adjusted gross income will be responsible for only $4,056 in taxes this year. Clearly this is a tax break, but the $558 they don’t have to pay in may not be enough to offset the loss of the personal tax exemption.
The simplest way to have avoided this disappointment is to have changed the number of exemptions you claimed on your W-4 form, the one that most new employees see as just another piece of paperwork they have to complete for the hiring process. You may not be able to do anything about it this year, but stop in to payroll and adjust the number of exemptions to take less home every month but get that huge refund check next year.
All of this leads to a few points that are worth keeping in mind when you consider how you will handle your money in the future. First, when the government announces major changes to the tax law, good or bad, cutout a slice of time to go through the details and understand how these changes will directly affect you, especially when planning on that huge annual tax refund. Second, take an annual assessment of the number of exemptions you are claiming on your W-4 form. Based on the 2018 numbers, the impact will not be the same as in previous years. Finally, keep track of political events (such as the government shutdown) that has the potential to delay your refund or cause other minor disruptions for your annual tax filing ritual.