Benjamin Franklin said that “in this world nothing can be said to be certain, except death and taxes.”
Just because they’re certain, doesn’t mean they haven’t gone through radical changes. Most recently, with the passage of the Tax Cuts and Jobs Act in 2017.
The change in the tax law lowered most people’s taxes, but it may not feel that way during this tax season. Statistics indicate the average refund has fallen.
Early filers’ average refund has decreased to $1,865 from $2,035 per the IRS’ reporting, which compares numbers from the beginning of February 2019 and 2018. It’s still too early to call, but even if this pattern holds, it does not signal higher taxes. Despite the skimpier checks from Uncle Sam, the average person will pay less in taxes, said Adam Sweet, principal at Eide Bailly’s Spokane office.
An essential piece of the puzzle is the withholding timetable the IRS issued to all employers in the beginning of 2018, which in most cases decreased the amount people were paying in taxes out of their paychecks. Though the IRS issued a new W-4 worksheet in late February 2018, there was no requirement for an employee to fill it out. A W-4 tells an employer how much to withhold from an employee’s paycheck for taxes.
“So that’s the disconnect. People didn’t realize that in effect they had more take-home pay every paycheck because they were paying in less,” Sweet said. “People forget to look and say, ‘Well, actually, my take-home pay is greater and that’s why I’m getting less of a refund.’ ”
Cary Snyder, a certified public accountant who owns her own business, said the implementation of the new tax code was a “circus.”
“The tax law passed, but they were scribbling in the margins before they passed the tax bill, so there were a lot of mistakes that needed to be corrected and Congress didn’t correct them,” Snyder said. “Some of the rules for the tax law weren’t even issued until January of this year, so how do you plan a whole year when you don’t know what the rules are?”
The major features of the new tax code are the change in income brackets, lowering of tax rates, and the doubling of standard deductions. However, for people used to paying less tax by itemizing their deductions, some of those deductions have been taken away or changed.
For example, parents will find that their children have doubled in value – from a $1,000 credit to $2,000 – but there’s notable fine print: The exemption that allowed you to deduct a little over $4,000 from your taxable income per child was eliminated, Snyder said.
People who live in areas that have high local and state tax only will be able to deduct up to $10,000 of those taxes. For people who live in an area with high property taxes, this change could hurt a few wallets, Sweet said.
Another example of a group that could be hard-hit by tax code changes is truck drivers, because the deduction of employee work-related expenses was eliminated. This means that on-the-job costs such as licensing, drug screenings and hotel stays will no longer count as deductions, Snyder said.
Another possible consequence could be companies changing the ways they schmooze their clients or employees: Entertainment-related expenses are no longer deductible. Sweet said some companies may be able to reclassify these deductions, for example, as an advertising expense.
Snyder said her clients haven’t been dealing with sticker shock because she worked with them throughout the year to adjust their payroll withholdings, but until they received their final results, she had noticed pessimism.
“Even though we did all that work, like – I don’t always know what my mechanic is doing, he explains it but I don’t get it – so they’re still coming in and going, ‘Am I going to get hammered?’ ” Snyder said. “… I think there’s disbelief, even when we’ve done the work, that it’s going to be OK.”
Snyder and Sweet said that checking in with your accountant throughout the year and keeping them updated on major changes is the best way to prevent an unpleasant surprise next year.
“Taxpayers, once they have a level of complexity to their affairs, it probably doesn’t hurt to have a CPA involved,” Sweet said.
If all this seems convoluted, bear in mind that even Albert Einstein once joked that the most difficult thing to understand was income tax.