Mikhail Goldenkov/Strelka Institute/Flickr
Tax Day 2019, the last day to file your 2018 tax return, is Monday, April 15.
It’s the first tax season under the new tax law President Donald Trump enacted in late 2017. It was the most significant overhaul of the US tax code in 30 years.
According to IRS data, the average federal tax refund amount is down about 8% from last year, to $1,865.
If you receive a smaller refund or owe money to the IRS, it’s not an indication that you’re worse off financially, according to financial experts.
We’re two weeks into the 2019 tax filing season and refunds are starting to roll in.
According to IRS data, the average federal tax refund amount is down about 8% — to $1,865 — for the first week of the 2019 filing season compared to the same window last year. The total number of refunds issued dropped by 24%.
Smaller refunds are a likely result of the new tax law President Donald Trump enacted in late 2017, which was the most significant overhaul of the US tax code in 30 years. The tax law instituted new guidelines for how much employers should withhold from employees’ paychecks for taxes, resulting in an increase in take-home pay for about 90% of Americans, Business Insider’s Bob Bryan reported.
Employees who didn’t adjust their withholdings after the new guidelines were released could be receiving a smaller refund than they expected this year, Mark Jaeger, the director of tax development at TaxAct, told Business Insider.
"Depending on a filer’s tax situation, they may not get as large of a refund this year as they’re used to if they didn’t adjust their withholdings in 2018. That said, they shouldn’t immediately be alarmed if that’s the case," Jaeger said.
"Many filers received a boost in their paychecks throughout 2018; that’s where the remaining amount of their refund went," he said. "Instead of waiting to receive their money as a tax refund, they received it all year long."
According to a January article in The New York Times, a Treasury Department analysis provided to the Government Accountability Office estimated that compared with last year, about 4 million fewer filers would receive refunds this year, while about 4 million more filers would have a balance to pay on their taxes because of the new withholding system.
"The good news is the IRS just announced they are waiving the estimated-tax penalty for any taxpayers whose 2018 federal income tax withholding and estimated tax payments fell unexpectedly short of their total tax liability for the year," Jaeger said. It means that if you paid at least 85% of your tax liability through the year, you won’t have to pay the typical late-payment penalty.
Meanwhile, a team of UBS analysts projected that most married filers with two children would see a pretty sizeable boost in their refunds for 2018 compared with 2017, especially those making under $40,000 a year and those making $125,000 to $400,000.
But at the end of the day, receiving a big refund is neither good nor bad, Jaeger said, adding that taxpayers can either reduce or increase withholdings — the amount of money an employer withholds from your paycheck to cover your tax liability — to determine the size of their refund.
"Just because you receive a small refund doesn’t mean you didn’t get everything back you were owed or that you’re worse off financially — it most likely means you paid the right amount of federal taxes you owed during the year and didn’t overpay," Jaeger said.
Big tax refunds generally mean you paid too much in taxes — you had too much income tax taken out of each paycheck, and now the IRS is returning what is rightfully yours. Instead of keeping your money in a savings or retirement account where it could earn interest all year, you essentially gave an interest-free loan to the government, Business Insider previously reported.
As Business Insider’s Lauren Lyons Cole, a certified financial planner, said, "I always try to either owe slightly or break even when filing my tax return." A tax refund of zero means you optimized your income throughout the year, putting yourself in the best possible position to increase your net worth, she said.
"Some individuals like receiving a larger refund because they use it as a savings account," Jaeger said. "It’s a way for them to save a significant chunk of money throughout the year. For some, that’s a perfectly fine strategy, as long as you can cover all of your other expenses throughout the year."
- Read more of our 2019 Tax Day coverage:
- The deadline to file your taxes is April 15 in every state except Maine and Massachusetts
- It took me under an hour to file my taxes this year thanks to a time-saving strategy that’s available to anyone
- Here’s how you can file your taxes online for free this year
- After someone stole my tax refund 2 years ago, I found the best way to protect myself is also the easiest
- After getting in trouble with the IRS, I’ve figured out the best way to do my taxes for working multiple jobs
- The IRS says the busiest day of tax season is right around the corner, and there’s a simple way to beat the rush
- I’m a financial planner and if you ask me, there are much smarter ways to spend your tax refund than the lavish vacations and trendy gadgets I see all the time
Source: Business Insider