For some Americans, this tax season so far has come with an unwelcome surprise – either a smaller-than-expected refund or, even worse, a jarring bill from Uncle Sam.
Most got their tax savings in their paychecks during the year, but the loss of a sizable refund is hitting their finances now. Some are getting refunds that are half their normal size, while others are thousands of dollars in the hole for the first time.
To manage, they are readjusting their spending plans to align with a tinier refund. People who owe are pulling from savings, taking out a loan or signing up to pay off the IRS in installments. They plan to consult with tax pros, so they can avoid another money disaster next year.
“We’re finding out that those with the biggest refund change are those that didn’t do tax planning last year,” said Lynn Ebel, director of The Tax Institute at H&R Block.
So far, according to IRS statistics, the average refund is down 8.7 percent from this time last year, following the biggest tax law changes in decades. The share of returns getting a refund is also slightly lower than a year ago. The IRS doesn’t offer figures about what people owe.
That’s my refund?
Americans love their tax refunds – even if they give the federal government interest-free loans for the year by having too much withheld in each of their paychecks. Many prefer the money returned to them as a big check in the spring. The forced savings helps them preserve a predictable windfall, one they can’t dip into during the year.
Past taxpayer surveys show they use those funds to reduce debt, pad savings, pay for a vacation or other large purchases. Overall, about three-fourths of taxpayers get a refund, which last year averaged just under $3,000.
Jennifer and Daniel Yuen planned to use their refund to support their oldest daughter, who moved to Washington, D.C., to train with the Washington Ballet. The couple pays for her tuition and rent.
Last year, they got almost $800 back. This year, they owe more than $5,000 – a major burden for the Chicago couple.
“We’re strapped,” said Jennifer, a special education teacher. “That’s three to four months of my daughter’s rent or half of her tuition.”
Instead, they are considering a payment plan with the IRS because they can’t afford to write such a big check. Those extra monthly payments will dent other plans they had for this year, too.
“This will put off the car that was supposed to replace our 11-year-old one,” Jennifer said.
Who owes taxes?
Jennifer says the elimination of the unreimbursed employee expenses deduction hit their taxes hard. Both she and her husband, who is a stagehand, often spend their own money on job supplies — all of which used to be tax-deductible.
“That’s what really killed us,” she said.
The Yuens fit the profile of those taxpayers most at risk for smaller refunds or owing the government, Ebel said.
Homeowners in high tax states, employees with a lot of unreimbursed expenses and people who itemize with no dependents all could experience an unpleasant tax season.
Kathleen Trisdale expected to owe something this year. “Maybe a few hundred dollars,” said the resident of California, a state with high taxes.
Instead, she owes more than $2,000, a hardship for the disabled veteran, who depends on her military pension and Social Security for income.
“I actually had to take out a signature loan from my credit union to pay my taxes and had to increase my monthly deductions by $300 to make sure I’m not hit hard next year,” Trisdale said. “So not only am I hit with this tax hike, I am now more in debt and I have less income at my disposal each month.”
She’s not entirely sure why her taxes ended up this way. She noticed that she couldn’t deduct her college tuition and other school expenses. She’s pursuing a four-year degree in environmental science and management.
Trisdale, 54, also couldn’t write off the interest she paid on her mortgage because she took the standard deduction.
She plans to see a tax professional for help, “which will cost me even more,” she said. “I’m a low-income person so I didn’t think I would be affected this much.”
In large part,those who owe money to the federal government aren’t necessarily paying more in taxes after the major changes to the tax law. In fact, four in five taxpayers are estimated to get a tax cut, according to the Tax Policy Center.
But if you didn’t change your paycheck withholdings – which most taxpayers didn’t do – your tax savings were doled out during the year in each paycheck, reducing or eliminating your refund.
“When we compared withholdings of people on file, September 2017 versus September 2018, it was largely unchanged,” said Pete Isberg, head of government affairs at ADP, a payroll and HR services provider. “Generally, few employees changed their withholdings.”
Workers may have not noticed any changes to their paychecks either, Isberg said, because their 2018 paychecks not only included the tax law changes, but also any changes to their other benefits, such as healthcare premiums.
“So, net-net they may not have seen an increase,” he said.
Adjusted withholdings, but not enough
Diana Hansen didn’t want to take any chances on her refund that she planned to use for a trip to Bermuda this year to celebrate her 25th anniversary with her husband. Aside from her typical withholdings, Hansen – an executive administrative assistant – had $100 more taken out of each paycheck.
It still wasn’t enough. The couple – who normally gets $1,000 to $3,000 back – owes $4,200 in federal taxes.
Diana thinks the $10,000 cap on the state and local tax deduction is largely to blame. Fortunately, the couple has enough in savings to pay in one lump sum.
“But it kills me,” she said. “You get your savings to a certain level that you have a buffer, and then this happens.”
She and her husband will still go to Bermuda and, in the meantime, are adjusting their withholdings for next year. So far, she’s taking out an additional $150 from her paycheck, but could do more if needed.
“Our taxes are sitting right here,” she said. “I haven’t signed them and won’t until the very end.”
Actually paying more in taxes
In some ways, Stephanie Harris is one of the luckier ones. The 53-year-old actuary in Pittsburgh is still getting a refund, but it’s about half of what it usually is. Even so, she is one of the five percent of filers that the Tax Policy Center estimated would end up paying more in federal taxes following the changes to the tax law.
“In the past five years, my effective tax rate has been as low as 6.13 percent and as a high as 8.43 percent,” she said. “This year, my effective tax rate was 9.38 percent, the highest it’s ever been.”
Harris ended up taking the standard deduction of $24,000 for married couples filing jointly. But the elimination of the dependent exemption – she has two children she can claim – and the $10,000 cap on the state and local tax deduction didn’t help her refund.
“This means we have to take more out of savings toward paying the rest of this year’s tuition [for her child],” she said. “More than we counted on.”