Personal Finance:  Tax Season – Dude, where is my refund?

Personal Finance: Tax Season – Dude, where is my refund?

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 on 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 Nerd-Wallet, 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 is likely that a complete grasp of the changes will only emerge after filing 2018 returns.

The bottom line is that most taxpayers are likely to receive smaller refunds, but will have received more take-home pay throughout the year. One group that may actually see a larger refund is families with minor children, thanks to the sweetened child tax credit. Another includes some filers who don’t have a mortgage interest or property tax deduction; they may benefit from the increased standard deduction ($24,000 for married couples).

If you have prepared your tax return and found that you had to pay this year, or simply wish to add a little more cushion, it’s not too late to act before next tax season. Ask your payroll department for a new form W-4 to fill out (or download a copy from the IRS website) and revise your selections. In general, the more withholding allowances you claim, the less money will be withheld from each pay period, so reducing your allowances will increase the amount you may get back at the end of the year. There is a worksheet included on form W-4 to help you choose your withholding allowances, and numerous free calculators are available on the web including one on the IRS site. And note that you may revise your selections at any time by simply filling out a new form.

If you’re still bummed about a smaller refund, go back and compare check stubs with last year’s. Chances are, you came out ahead.


Christopher A. Hopkins, CFAVice President and portfolio manager
Barnett & Company

Chris Hopkins

Chris Hopkins, CFA, is Vice President and Portfolio Manager for Barnett & Company. He is a native of Whittier, California and has lived in Chattanooga since 1988. He began his career in finance in 1998, following twenty years in manufacturing management. Chris joined Barnett & Company in 2004. He served for twelve years an adjunct professor of Finance at UTC, and writes a weekly column for the Chattanooga Times Free Press on finance and economics. He is currently president of the CFA Society of East Tennessee, and is a member of the North Carolina and South Carolina CFA Societies as well as the National Association for Business Economics. He presently serves as city council representative on the Chattanooga fire and police pension board, and is member of the finance committee for the AIM Center. Chris holds the Chartered Financial Analyst (CFA) professional designation. He received Bachelor’s degrees in Physics and Economics from California State University at Fullerton, and earned his MBA from the University of Tennessee at Chattanooga.
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