Many taxpayers throughout the United States are wondering why their refund for their 2018 taxes is much lower than the previous years. I’m Michael A. Mellace, CPA from Pink Harbor, CPA and I am here to give some answers to that question. Mike can be reached at (856) 226-9524 or by e-mailing firstname.lastname@example.org. You can also book a tax appointment with Mike by clicking here.
Tax Cuts & Jobs Act
On December 22, 2017 President Donald J. Trump signed into law the “Tax Cuts & Jobs Act.” This law was the most monumental changes to the tax code in over the last 30+ years. Personal income tax rates dropped on average by about 3.5%. The Child Tax Credit doubled from $1,000 to $2,000, and more families were eligible than ever before. Taxpayers with dependents over 16 were now able to get a dependent credit of $500, where none existed before. The Standard deduction was increased to $12,000 for a single taxpayer, $18,000 for a Head of Household and $24,000 for a Married Filing Jointly taxpayer. So, all of that should mean a bigger refund, right? Not necessarily.
Tax Withholding Tables Slashed
Reason #1 your 2018 tax refund is lower – Tax withholding tables were slashed in January 2018, and most taxpayers started to notice a bump in their pay. While the average taxpayer’s tax rate dropped 3.5%, the withholding was lowered much more depending on the way the taxpayer had filled out their W-4, Employee’s Withholding Allowance Certificate. Many taxpayers, especially those who had higher itemized deduction amounts, had claimed extra exemptions on their W-4’s in order to get more in their pay each week. Those extra exemptions led to an even further massive lowering of withholding once the tax withholding tables were slashed. All of that money each week was given to you in your paycheck rather than having been withheld and paid over to the IRS. Even with all of the other negative impacts we will mention further down, almost every taxpayer we are seeing had a reduction of their net tax liability when comparing 2017 to 2018. The main reason taxpayers are not seeing the decreased tax liability in their refunds is because the federal withholding on their paychecks was reduced too much!
Elimination of Personal Exemptions
Reason #2 your 2018 tax refund is lower – Personal exemptions were eliminated. This hit married filing joint taxpayers the hardest. For tax year 2017 everyone received a $4,050 reduction in their taxable income for each person who appeared on their tax return. In tax year 2017 a married filing jointly couple with 2 dependents would have claimed a $12,700 standard deduction plus $16,200 in personal exemptions, totaling a $28,900 reduction of taxable income. In 2018, even with the standard deduction being increased to $24,000 for married filing joint taxpayers, the amount a married filing joint couple who took the standard deduction actually had the income they were taxed on increased by $4,900 if they had 2 dependents, $8,950 they had 3 dependents, $13,000 if they had 4 dependents and so on. Simply put, a married filing joint couple that doesn’t itemize and has more than 1 dependent actually had a higher taxable income under the new law.
State & Local Tax Deduction (SALT) Capped at $10,000
Reason #3 your 2018 tax refund is lower – State & Local Tax (SALT) Deduction was capped at $10,000. Previously a taxpayer who itemized at paid $9,000 in real estate taxes, and $4,000 in state taxes would have had a $13,000 tax deduction. Starting in tax year 2018, that tax deduction has a $10,000 ceiling – meaning a taxpayer can not write off more than $10,000 in SALT deductions.
Elimination of Unreimbursed Employee Expenses
Reason #4 your 2018 tax refund is lower – Unreimbursed Employee Expenses and Other Miscellaneous Deductions were eliminated. Do you pay high union dues? Do you drive your car a lot of for your employer (especially traveling salespeople) but you’re not reimbursed? Do you buy tools to do your job? Do you buy special uniforms or work clothes? If so, you most likely took advantage of the unreimbursed employee business deduction. Although this deduction was reduced by the 2% of a taxpayer’s Adjusted Gross Income, this still could have equated to a large deduction. Having large unreimbursed employee expenses usually allowed you to write off other miscellaneous items such as tax preparation fees, investment fees and safe deposit rental fees.
More Taxpayers Forced to Take the Standard Deduction
Reason #5 your 2018 tax refund is lower – More taxpayers are being forced into taking the Standard Deduction instead of itemizing deductions. With the limitation of the SALT deductions and the elimination of the unreimbursed employee expenses, there simply is not enough in deductions for many taxpayers to itemize. Therefore, more taxpayers than ever before are now taking the standard deduction instead of itemizing. This even further drives up the amount a taxpayer is taxed, especially those taxpayers with dependents.
How to Fix it For 2019
2018 is done. There’s nothing we can do about it now. How do you make your situation better for 2019? Here’s some tips.
Consider Firing Your Tax Practitioner
Do you pay a tax practitioner to prepare your taxes? When you had your taxes done last year, did they discuss with you the implications of the Tax Cuts & Jobs Act and advise you on how it would impact your taxes for this year? If not – FIRE THEM! Any tax practitioner using professional software had well within their resources easy tools to project the impact of these changes to you. If your practitioner didn’t – FIRE THEM! Also, if your practitioner wasn’t able to fully explain to you why you got less money back this year – FIRE THEM! You’re paying them to give you full detailed explanations and to advise you.
Consider Reducing Withholding Allowances on Form W-4
Did you owe money to the IRS? Are you very unhappy with your refund? Consider submitting a new Form W-4 to your employer. Yes, your net paycheck will go down each pay period. However, you won’t owe money next year or your tax refund will go up.
Keep Good Records of Non-Cash Charitable Contributions
Non-cash charitable contributions remain to be one of the best itemized deductions, yet severely under reported because of taxpayer laziness. At Pink Harbor, CPA, time after time a taxpayer will come into our offices and tall us “I gave 10 bags of clothes to charity last year.” We’ll ask the taxpayer “Did you keep a list of every item in the bags, estimate wheat each item had cost you to purchase and estimate a resale value had you sold the item on a yard sale site?” Almost always, we receive a blank stare and therefore the taxpayer underestimates the value to be about $40 per bag. Depending on the clothes and household items given, a taxpayer can literally be shortchanging themselves by thousands of dollars in deduction had they simply maintained a list of items given and attached that list to the donation receipt. Stop short changing yourself!
Call Your US Senator & US Congressperson
Call your US Senator and congressperson. Insist that the entire SALT deduction be reinstated without reductions and that unreimbursed work expenses be reinstated. A tax cut is only a tax cut when everything remains the same. In our opinion, middle class taxpayers who itemize are the most impacted by the reduction of SALT and elimination of unreimbursed employee business expenses. These need to return in some form.
Have Pink Harbor, CPA Prepare Your Taxes
At Pink Harbor, CPA we can’t work magic. We can’t bring back deductions and credits that were eliminated. But we can make sure that you get EVERY deduction and credit that you’re legally entitled to. We will provide you with a line by line explanation of your tax return, plus show you how to fix things for the future. Call Pink Harbor, CPA today at 856-226-9524.