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Unhappy With Your Tax Refund?


Americans love their income tax refunds. Some take vacations with the proceeds, others finally pay off lingering Christmas bills, and yet others put a down payment on a new car or other high-priced toys. A few use the annual event to fund a Retirement Account, and we congratulate them for finding a worthwhile use for their own money. After all, their own money is being returned to them by the same government that took it away in the first place. The annual refund has become a staple in American lifestyle. That is unfortunate (I know, that is not what most people believe, much less what they want to hear).

Every now and again our overly-complex U.S. Tax Code is changed significantly by Congress. When this happens, new tax withholding tables are produced by the IRS. The new tables are designed to reflect differences in expected individual tax bills after the tax changes are applied. In theory, your individual refund (or tax due) will remain roughly the same as the prior year. In theory.

The Tax Cuts and Jobs Act of 2017 was passed late in 2017, and took effect almost immediately on January 1, 2018. This change caught most of us by surprise, and left insufficient time for IRS to make required tax withholding table changes. Subsequently, many people were surprised that their refunds were vastly different in early 2019. Reactions went both ways, as the tax changes affected people differently.

While there is a direct relationship between “take-home pay” and tax refunds, that distinction is lost on many Americans. Although most people received larger paychecks throughout most of 2018, many failed to make the connection between their net paychecks and the next tax refund (or bill). Many were mightily unhappy with refunds they received in 2019 for the prior tax year.

As the 2019 tax return filing season began, early tax refunds were, on average, smaller than those received in 2018. This left many people bewildered, and served as political fodder for opponents of this Administration. However, as more and more tax returns were processed, 2019 refunds rose to historical averages. The naysayers quickly quieted.

From the perspective of a financial planner, the most desirable tax refund (or tax bill) is a big, fat Zero. This would mean the taxpayer pre-paid the exact amount due, rather than making an interest-free loan to “Uncle Sam.” Theory is wonderful, but it is apparent that many people would rather receive a refund.

IRS uses Form W-4 to give taxpayers some say in how much of their gross pay is withheld from every check. The W-4 is once again being redesigned, and when that is complete, we will cover the new form and its implications. For now, rest assured that about 84% of taxpayers received actual cuts in taxes starting in 2018. Managing your refunds will take some doing. We offer Tax Planning to clients as part of our overall service.

Meanwhile, do not expect to find a simpler Form W-4 in 2019. Adapting your own withholding to the current Tax Code will require a more thorough understanding of the changes.

Van Wie Financial is fee-only. For a reason.