The current filing season has managed to rile many, with smaller refunds than expected, or the unthinkable…needing to write a check to cover the unexpected balance due. I keep my ear tuned to comments by tax return preparers and they are sharing stories. One received a phone call from a client: “yesterday, when you told me how much I owed, I had an out of body experience and did not hear anything after that. Could you please explain it again?” Did the good folks that write tax laws meant to give people out of body experiences?
The answer has several moving parts. The Tax Cuts and Jobs Act made important changes to individual taxes. An example: personal exemptions were traded for a credit (a “payment coupon” if you will) after you figured your tax. For many it wasn’t a fair swap because lost exemptions were worth more than new credits. If your child turned 17 sometime in 2018, the value of the credit dropped from a potential $2500 to $500.
Many other new limitations, such as caps on mortgage interest, state and local tax, and repeal of miscellaneous deductions, could have had a big impact. One’s tax computation could likely be brand new, not at all related to previous years.
To add to this, in January 2018 the IRS issued new withholding tables to reflect changes made by the new law. The idea was to have more money in people’s paychecks immediately. Remember the person who could then buy a Costco membership with the “extra money” ($1.50 weekly) on her paycheck? The new tables generally lowered the amount of withholding. But taxes are never a “one size fits all” thing. People are seeing that under withholding comes to the fore in the way of a tax bill, because expected (and much touted) tax savings did not materialize for all. The IRS confirms that refunds are about 10% smaller this year, on average. Painful indeed…and this does not even begin a conversation about state income taxes.
Going forward, do “dummy” returns with your expected annual numbers, or have your preparer do them for you. I know, you would much rather have a root canal done….but if you are going to have to pay, it’s much, much better to know ahead of time.
In 1942, Irving Berlin wrote a song about paying the income tax…inspiring the title for this article. What would he sing today?