If you count on getting a tax refund every year when you file your return, you may be worried about recent reports that tax refunds are lower than usual this year. With all the changes as a result of the Tax Cuts and Jobs Act of 2017, there is a lot more uncertainty regarding taxes this season.
Early reports about general trends have little to do with your personal tax liability, however. In addition, some news reports don’t tell the whole story.
Here’s what you should know about tax refunds and total tax liability for 2018.
1. Early reports of lower tax refunds are based on a relatively small number of taxpayers.
As of February 1, 2019, according to the Internal Revenue Service (IRS), over 16 million income tax returns for 2018 have been received. That’s just over 10 percent of the total number of returns filed every year. The first reports of lower refunds may have nothing to do with you. It’s still early in the season, and a small group of the first people to file may not be representative of all filers.
2. Tax refunds have little to do with total tax liability.
Your total tax bill for the year is much more important than the amount you get back as a refund when you file. In fact, you’re better off adjusting your income tax withholding and estimated tax payments so you get a very small refund, or none at all when you file.
Many people who receive smaller refunds this year may still be paying less in tax for 2018 than they would have under the old tax law. Early last year, the IRS issued new income tax withholding tables for employers, which reduced the amount of money many taxpayers had withheld from their pay. That means they got bigger paychecks for most of 2018. Even if the difference in every paycheck didn’t seem that large, it adds up over the course of a year.
Instead of comparing 2017 and 2018 tax year refunds, ideally, news reports should compare people’s 2018 tax bills (not refunds) using 2017 tax laws, with their actual tax bills for 2018. Comparing the same year under both the old and new laws would be a more accurate way to see how the new laws affect people because their financial situation and other factors may have changed year over year. For example, if they made more or less money in 2018, that could affect their tax bill more than tax law changes.
Unfortunately, refiguring your 2018 tax with 2017 laws isn’t the easiest. The next best thing is to compare your total tax bill on Form 1040 for both years, assuming your income and other factors haven’t changed much from one year to the next.
3. Most taxpayers owe less in total income taxes in 2018 than they would have under the old tax laws.
- Larger standard deductions. The standard deduction is almost double for every filing status starting in 2018. In fact, most taxpayers don’t need to itemize deductions anymore, because they receive a greater tax benefit by using the standard deduction.
- Expanded Child Tax Credit. The Child Tax Credit is now $2,000 per child, up from $1,000 in 2017. That makes up for the loss of the dependency exemptions for most taxpayers.
- Credit for other dependents. A new tax credit of up to $500 for each of your older children and other dependents may also lower your bill.
4. Some people will owe more tax under the new laws.
For some people, the new tax changes mean they will owe more tax. You are most likely to owe more tax in 2018 if:
- You previously took large deductions for state and local taxes, including property tax. The total deduction on one tax return is now limited to $10,000 ($5,000 if married filing separately).
- Your mortgage interest deduction is limited. If you have a mortgage higher than $750,000 that you took out after December 15, 2017, you can only deduct mortgage interest on the first $750,000 of your loan. In addition, you cannot deduct interest on home equity lines of credit (HELOCs) unless you used the money to buy, build, or substantially improve your home.
5. What should you do about it?
You may get a smaller refund this year, or even owe money when you file. Or you may get a larger refund. There’s one way to stop worrying about it – file your taxes sooner rather than later.
If you’re getting a refund, filing sooner means you can get your money quicker and make good use of it. If you have any credit card or other consumer debt, for example, you can use your refund to reduce your debt and interest expense.
The sooner you know, the better you can make plans to pay your bill and avoid any interest and penalties for not paying on time.
Another reason to do your 2018 taxes as soon as possible is to determine, based on your 2018 results, if you need to change your income tax withholding or estimated tax payments for 2019. Remember, the goal is to not have a huge tax refund (that is unless you like to use your refund as a means of saving). The goal is to have as close to the right amount withheld from your paycheck as possible. That way you don’t have a big bill at tax time. Plus you can put as much of your own money to good use all year long.
Source : TaxAct Blog