Shrinking tax refunds stir complaints about tax reform, but truth is more complicated

    FILE - This March 22, 2013 file photo, shows the exterior of the Internal Revenue Service building in Washington. (AP Photo/Susan Walsh, File)

    Complaints are growing about tax refunds shrinking or disappearing completely as a result of changes made by the 2017 Tax Cuts and Jobs Act, but tax policy experts say these horror stories do not necessarily mean people’s taxes have gone up or they have been adversely affected by the law--though a small percentage of taxpayers are indeed paying more.

    As the Internal Revenue Service begins processing tax returns for 2018, many early filers have been disappointed to learn they are getting much less back from the government this year or that they actually owe money for the first time.

    This has led to much consternation on social media as Americans share the impact this has had on them and the purchases they can no longer make after their refund fell short of their expectations with hashtags like #GOPTaxScam.

    As of Feb. 1, the average refund check for 2018 was down 8 percent from the previous year and 24 percent fewer refunds had been issued. The IRS cautioned against reading too much into that data because a partial government shutdown has delayed processing and many people who receive larger refunds tend to file later.

    “Using the data they released Friday is probably not the most representative,” said Nicole Kaeding, director of federal projects for the Tax Foundation.

    The TCJA reduced tax rates for each income bracket, doubled the standard deduction, increased the child tax credit, and eliminated most other deductions. Tax withholding tables were adjusted last February to reflect those changes, so most workers had less taken out of their paychecks up front.

    Mark Mazur, director of the Tax Policy Center, said Americans who like to get a tax refund—and many of them do—may be disappointed this year, but most likely did get a tax cut.

    “People are just focusing on the refund amount or the balance due, not their tax liability,” he said.

    Derided by Democrats as a giveaway to the rich, the TCJA has never been particularly popular, and support for it eroded further over the course of 2018 as most Americans reported they did not see a benefit from the bill in their paychecks. Republicans had hoped public opinion would turn around when people saw a lower tax bill this spring, but these anecdotal reports raise doubts.

    With the benefits of the tax cut spread out across 52 weeks, the gain may have been hard to spot, especially if workers saw increases in health insurance premiums or other costs. According to the Institute on Taxation and Economic Policy, the middle 20 percent of income earners received an average of about $33 more per paycheck in 2018.

    “Think about a person who got a $500 tax cut over the year,” Mazur said. “Over 50 weeks, that works out to about $10 a week, probably small enough it wouldn’t be noticed in their paycheck.”

    Some changes to the tax code, like caps on deductions for mortgage interest and state and local tax payments, could lead to higher tax bills, especially for those in states with higher taxes of their own. However, initial estimates that about 80 percent of taxpayers would see a net cut and about 5 percent would see a tax increase still seem to be on target.

    “It’s a big country so 5 percent times 150 million taxpayers is like 7.5 million people,” Mazur said, which means more complaints could be coming from those hit with higher bills in the weeks ahead.

    The government saw this problem coming and tried to head it off. The Government Accountability Office issued a report last July warning about 3 percent fewer people would receive refunds for 2018 and more people would owe the IRS money at the end of the year.

    The IRS attempted several times to encourage the public to review withholding tables and determine whether their paychecks were properly adjusted after the new law took effect. In December, the agency issued a statement urging taxpayers to check their withholdings and make a quarterly estimated payment if they came up short.

    “Taxpayers who itemized in the past who now choose to take advantage of the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations, are at most risk of having too little tax withheld from their pay. This is especially true if they didn’t update their withholding earlier this year,” the IRS said.

    As the White House looks ahead to the 2020 election, Trump economic adviser Larry Kudlow told reporters last week the administration is considering another round of tax cuts.

    “We’re kicking it around,” Kudlow said, offering no details. “Looking at a couple of very interesting things that may wind up surprising voters.”

    During the midterm campaign, President Trump repeatedly claimed a new middle-class tax cut would be coming after the election, but nothing ever materialized.

    Despite the grumbling from some taxpayers, Republicans may have some reason for optimism about the TCJA. GOP pollster David Winston recently told The Washington Examiner post-midterm data suggested the Republican economic message was more popular than the Democratic one, but only 32 percent of voters understood how key provisions of the tax reform bill affected them.

    “Republicans can take heart that their economic policies not only seem to be working, but when voters understood what was in the tax bill, they favored Republicans by a comfortable margin,” Winston said.

    Experts say next year could look very different if people disappointed by this year’s refunds are motivated to adjust their withholding for 2019.

    “Ideally, an individual adjusts their W-4 every year,” Kaeding said. “It was even more important last year because of the large overhaul of the tax code, but individuals should make this part of their tax filing process every spring.”

    As Americans prepare to file their 2018 tax returns, Kaeding stressed their refunds are not reflective of their overall tax liability, and they have the opportunity to change their withholding for 2019 if they still want to see a bigger refund in 2020.

    “Individuals should not judge their taxes by their refund,” she said, though she acknowledged, “I know that is everyone’s instinct.”

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