By: Will Diem, Contributor
The Tax Cuts and Jobs Act of 2017 (TCJA), which went into effect on January 1, 2018, has created notable uncertainty and not a little anxiety over the last month.
On February 8, the IRS released data from the first week of tax filing, showing that the number of refunds processed had dropped nearly 31% while the average refund processed was down almost 9%: $1,865 this year compared with $2,035 for the same period last year.
The trend continued into the second week of February. The average refund processed in the week ending February 15, 2019 being $2,640 compared with $3,169 for the same week in 2018—a drop of more than 16%—while the number of refunds processed dropped by over 26%.
“We are seeing some clients have unexpected tax return results mostly in the middle income range,” says Brian Kuhn, financial planner with Planning Solutions Group in Fulton, MD.
The TCJA lowered tax rates on most income and doubled the standard deduction, but it also either eliminated or capped a number of popular itemized deductions, including the State and Local Tax—or SALT—deduction (which the law capped at $10,000), personal exemptions (which were eliminated), and all miscellaneous itemized deductions (also eliminated), including the deduction for unreimbursed employee expenses.
When it was passed, it was predicted that the new tax code would modestly lower the average household’s tax liability, though it was recognized the effects would not be uniform.
The possibility of shock from an unexpected tax obligation or a smaller-than-anticipated refund led H&R Block to give counseling lessons to its agents. As part of the annual training that agents receive prior to each tax season, “this year, agents also underwent ‘empathy training,’ which included a ‘refund surprise training module’ to coach their responses to clients shocked or upset by a lower tax refund or a surprise tax bill . . .” MarketWatch reports.
Also in anticipation of some filers having unexpected liabilities, in January, the IRS eliminated the penalty for many who had too little withheld from their paychecks, by waiving the penalty for anyone who paid at least 85% (down from 90%) of their actual tax liability. In a statement, the IRS explained the change was intended “to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes” introduced by the TCJA.
Following reports of the lower returns, some Congressional Democrats have accused Republicans of deliberately adopting less-aggressive tax-withholding tables—boosting take-home pay and improving the popularity of the Republican tax bill going into the 2018 midterm elections. “Republicans deliberately made a decision to goose the tax bill so they could get credit in the fall of 2018 and in effect saying it’s a long time until the spring of 2019,” Politico reports Ron Wyden, ranking Democratic member of the Senate Finance Committee, saying.
Republican leaders, meanwhile, have defended the bill. Senate Finance Chairman Chuck Grassley and House Ways and Means ranking member Kevin Brady, recently wrote in a USA Today op-ed, “The size of your tax refund has nothing to do with your overall tax bill. It merely reflects what you overpaid the IRS in your paychecks last year.”
Grassley and Brady’s defense echos the Treasury Department, which has insisted that lower tax refunds are a good thing. A Treasury spokesman called lower tax refunds “positive news for taxpayers,” since they receive “larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” according to a CNN report. A senior official noted that, despite some taxpayers’ perceptions, a tax refund is a not a windfall, a “dividend or a bonus check from the US government,” but only “the government giving them their money back,” according to CNN.
Morgan Stanley, meanwhile, has reiterated their prior predictions of higher overall returns this season.
Accounting for the lower number of total refunds processed in the first week of February, Ellen Zentner, Chief Economist for Morgan Stanley, cites the historic 35-day government shutdown, which may have delayed processing, as well as the possibility that a more complicated tax return has delayed some taxpayers from filing early.
As for the lower average refund processed in that time, Zentner notes that the number is based on a very small sample; last year only 5% of the total refunds processed through April had been processed in the first week of February. Further, she notes, there can be significant fluctuations in weekly numbers.
This mirrors a Treasury Department statement on Twitter that called the reports of markedly lower refunds “misleading,” citing the small sample of the early reports: “Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data.”
Further, Zentner notes that returns claiming certain credits—including the earned income tax credit and the child tax credit, which was increased under the TCJA—wouldn’t be processed until at least February 27th, due to fraud-prevention measures.
Nonetheless, Zentner stresses that it is aggregate tax returns that Morgan Stanley expects to be higher; the elimination or capping of specific deductions will certainly leave some taxpayers with higher tax burdens under the new code.
While it is too late to do anything about 2018 withholdings, financial planners say it would be wise for tax-payers to speak to a tax specialist as they plan for next year. “It is helpful to work with a tax advisor and have them help plan your withholding going forward, perhaps even more so for this tax year than others,” notes Kuhn.
Similarly, over the course of 2018 the IRS emphasized repeatedly the importance of employees’ updating their W-4s—which determines how much income tax is withheld from paychecks through the year, and consequently, whether the employee is over- or underpaying taxes through the year.
This article was contributed to www.psgclarity.com, a division of Planning Solutions Group, a financial planning firm. If you would like to discuss your financial goals with Brian Kuhn, CFP® the financial planner quoted in this article you may schedule a time using the online scheduler at this website, or calling 301-543-6035 or emailing him at BKuhn@psgplanning.com.
No portion of the content in this article may be construed as investment or tax advice.
Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC