Where’s my refund? Why did my taxes increase – or did they?

It seems like every day there’s a new article in the press about lower refunds, unexpected balances due, and lots of unhappy people. The Twittersphere is lighting up with complaints. So what’s going on? Well, when Congress passed The Tax Cuts and Jobs Act (TCJA) in late 2017, we heard a lot about how everyone was getting a tax cut. But then, because of the TCJA changes, the IRS published new withholding tables in early January 2018. Many people either did not notice the changes or were pleased to have more take-home pay – without doing a darned thing on their own. Everybody’s happy – so far. Then, those of us in the tax trenches said Hey, wait a minute! People will not understand that they’re getting more take-home pay now, but they’ll have a smaller refund (or worse) when they file their 2018 tax returns. Why? Because the size of your refund or balance due has nothing to do with your tax liability; it’s merely a reflection of whether you prepaid too much or too little.  Eyes glazing over yet? Bear with me for a little longer.

Take a look at your 2017 tax return.  Of course, the most important number to you may be the (literal) bottom lines 75 (refund)-78(balance due).  But that’s not your tax!  Look up a few more lines to Form 1040 line 63 – Total Tax. That’s your federal tax liability.  Now, look at your 2018 tax return. Wait, it’s different!  Why yes, this is the new “taxes on a postcard” 1040 model. Now it’s time to compare your 2018 total tax on line 15 of the new 1040 with your 2017 total tax on line 63 of the old 1040.  Is your 2018 total tax less than your 2017 total tax?  If so, you got a federal tax cut.

But how can I have a tax cut when my refund is smaller?  Because you effectively got your refund ratably during 2018 having less tax withheld from your paycheck. This is not necessarily a bad thing, but it stings when you did not realize and did not plan for it.

Take time now to check your 2019 withholding.  If you’re a do-it-yourselfer, check out the IRS withholding calculator on their website. If not, enlist a good tax pro to help you plan. Your enrolled agent is a good first stop on your way to understanding your taxes and optimizing your tax planning.