Question: Unlike most people, I ALWAYS file my taxes early as possible – and I ALWAYS get a refund of at least $2,000. This year, I actually owe money! How is that even possible? My job is the same, and while I got a raise, it wasn’t very much. My friends tell me it probably has something to do with the Trump tax cuts, but they’re all raging liberals. And how could a tax CUT raise my taxes? That makes no sense! Do you know what’s going on here? – Hope in Florida
Mandi Woodruff, Executive Editor of MagnifyMoney, responds…
It probably doesn’t help to hear that you’re not the only one facing an unpleasant surprise this year. Many are finding they owe money to the IRS when they were expecting a refund this year. But it’s true. And no one can blame you for being confused at how a tax cut turns into owing money.
In fact, a lot of people are asking the same question this year.
How Trump’s tax cuts are affecting your refund
One of the main pitches made by lawmakers in support of the Tax Cuts and Jobs Act of 2017 was that tax reform would provide tax cuts for everyone. But now that returns are being filed, many people are getting smaller refunds or having to write a check. That’s despite making zero changes to their job, income, and other factors that go into calculating their tax bill.
For some people, the problem is the loss of deductions they’ve claimed in the past. The new tax law put a $10,000 cap for state and local taxes. That eliminates the deduction for unreimbursed job expenses and does away with personal exemptions. In theory, the effect of dropping these and other popular deductions would be offset by expanding other tax breaks, such as the standard deduction and the child tax credit.
For other people, the problem stems from having less federal income tax withheld from their paychecks in 2018. Early last year, the IRS changed its withholding tables[1] in an attempt to more closely match the amount of tax people would owe under the new tax laws.
Employers and payroll companies use withholding tables to decide how much tax to withhold from employees’ paychecks. They determine that by their wages, marital status, and the number of withholding allowances they claim.
Your employer likely decreased the amount of federal income tax they withheld from your paychecks in 2018. You should have seen the withholding changes in your checks around the end of February 2018. So, instead of getting a big refund at the end of the year, you received more money in your paychecks.
So why weren’t the new withholding tables accurate? Well, here’s the problem: A tax return has a lot of moving parts, and withholding tables don’t always accurately reflect your unique tax situation. Some of the scenarios in which people might have too little tax withheld include being in a two-income family, having older dependents who don’t qualify for the child tax credit,or being accustomed to itemizing and claiming large deductions for state and local taxes.
How to avoid owing money on your tax return
So, which is it for you: loss of deductions or smaller withholding? Without looking at your tax return, we can’t tell you for sure. But you can get to the bottom of it by pulling out your 2017 and 2018 returns and doing a side-by-side comparison of the income, deductions, credits, and withholding.
To keep this from happening next year, you can complete a new Form W-4[2]to adjust your withholding for 2019. The IRS has a Withholding Calculator[3] that can help you ensure you have the right amount withheld. Turn the updated form into your HR department as soon as possible. Withholding takes place throughout the year, so if you need to adjust it, the sooner you get it changed, the better.
However, consider whether you might actually be better off writing a small check to the IRS at tax time rather than receiving a big windfall when you file. The money that sits in the IRS coffers until you receive your refund is essentially an interest-free loan to the federal government. Your money might be put to better use when you get it in a small boost to your paycheck every two weeks instead of waiting on a fat refund every spring.
For more information on filing this year, read How to File Taxes.
