Why would the IRS direct me to a Withholding Calculator if I’m tracking my refund? The answer is because many Americans are getting smaller refunds than last year. The reason those refunds are smaller is not generally because the taxpayer had less income, it’s because their withholding changed.
The Tax Cuts and Jobs Act of 2017 made a lot of changes to tax law, as I’ve discussed in several articles(here, here and here). As part of that law, withholding tables were revised. There were many articles last year telling folks to review their withholding after the new tables came into effect. Many saw their weekly take-home pay increase because of the adjusted tables. Unfortunately, in many cases that increase was more than the tax reduction many are getting under the new law, so their refund is less than expected.
Before you get upset because your refund is less than it was last year, please look at whether it was a result of you paying more tax, or it was a result of your withholding being incorrect. I want you to write down four numbers from your 2017 and 2018 returns. First of all, write down your Adjusted Gross income (AGI), reported on line 38 of Form 1040 (1040A or 1040EZ lines are different in each case). Next, write down your Taxable Income, reported on Line 43 of Form 1040. Next write down your Total Tax from Line 63. Finally, write down Total Payments from Line 74.
The forms changed significantly for 2018 and for my example, it should be pretty simple. On Page 2 of the 2018 Form 1040, Adjusted Gross Income (AGI) is Line 7, Taxable Income is Line 10, Total Tax is Line 15 and Total Payments is Line 18.
Now let’s start comparing the lines. If AGI increased, you made more money in 2018. If your AGI increased but your Taxable Income decreased, you benefitted from the increase in the Standard Deduction for 2018. Remembering how your income and taxable income changed, compare your 2017 and 2018 Tax. Most folks will find that, despite an increase in AGI (you made more money in 2018), your tax is less in 2018 than 2017.
Now look at your Payments. For most folks whose refund has gone down in 2018, this will be the problem. Their AGI (income) increased, but their payments decreased. Your tax went down, but your withholding went down more, resulting in a smaller refund, or in some cases, you owe with your return. This is easily fixed but you have to adjust your withholding with your employer. This isn’t anyone’s fault, it’s just a result of the tax law change.
This is just an example of how the new law could affect you. If you have specific questions, or if you need help adjusting your withholding, please call or email our office. Also, if you have an idea for a future article, or just have a topic you would like more information on, please contact me.
At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.