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Personal Finance: Dude, where’s my refund?

A 1040 tax form appears on display, Tuesday, Jan. 10, 2017, in New York. The IRS is delaying tax refunds for millions of low-income families as the agency steps up efforts to combat identity theft and fraud. Starting in 2017, a federal law requires the tax agency to delay refunds until Feb. 15 for people who claim the earned income tax credit and the additional child tax credit. The IRS says processing times will delay most of the refunds until the end of February. (AP Photo/Mark Lennihan)
A 1040 tax form appears on display, Tuesday, Jan. 10, 2017, in New York. The IRS is delaying tax refunds for millions of low-income families as the agency steps up efforts to combat identity theft and fraud. Starting in 2017, a federal law requires the tax agency to delay refunds until Feb. 15 for people who claim the earned income tax credit and the additional child tax credit. The IRS says processing times will delay most of the refunds until the end of February. (AP Photo/Mark Lennihan) A 1040 tax form appears on display, Tuesday, Jan. 10, 2017, in New York. The IRS is delaying tax refunds for millions of low-income families as the agency steps up efforts to combat identity theft and fraud. Starting in 2017, a federal law requires the tax agency to delay refunds until Feb. 15 for people who claim the earned income tax credit and the additional child tax credit. The IRS says processing times will delay most of the refunds until the end of February. (AP Photo/Mark Lennihan)

By Chris Hopkins 4 min read

photo Christopher A. Hopkins

Tax filing season is here again, and early reports show some taxpayers are getting an unpleasant surprise. Many are reporting smaller refunds than they received last year with the same basic income or even a bill from the IRS for taxes due. Weren’t we supposed to be getting a tax cut last year?

In general, the answer is “yes.” But given changes in the withholding schedules released in early 2018, many taxpayers may not have noticed that a little less tax was being held back from each paycheck. On balance, most Americans should see lower total taxes for 2018, but may get less rebated at year end.

Early data from the IRS indicate that the average refund for 2018 is around $1,950, 8.4 percent lower than last year’s $2,135. And the number of returns for which a refund is due is down by 16 percent versus 2017, arising mostly from the changes in the withholding schedules from the IRS that dictate how much of each paycheck is sent to Uncle Sam.

It may seem obvious, but a tax refund is indicative of systematic over-withholding throughout the year. The amount deducted every pay period is determined by a published formula which is revised each year based upon any changes to the tax structure, and by the employee’s designations on form W-4. The formula was revised significantly as the result of the Tax Cuts and Jobs Act, signed into law in December 2017. As the result of reductions in the marginal tax rates, the IRS reduced the amount withheld at each level of income from workers’ paychecks.

Few of us took the time to review our withholding in light of the new tax law, in part because we are not yet up to speed on the changes. According to a recent survey by NerdWallet, roughly half of all Americans do not understand how the TCJA affects their specific tax bracket. And besides the reduction in tax rates, the law incorporates other substantial changes including a big increase in the standard deduction, and a doubling of the child tax credit. It ls likely that a complete grasp of the changes will only emerge after filing 2018 returns.