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“Why is my tax refund lower this year compared to last year?”

Hi this is Matt Hylland with Hylland Capital Management for our ask a financial advisor series.

Its tax time, and that means all this week we are covering topics that you should know about your personal income taxes.

Today’s question is:


“Why is my tax refund lower this year compared to last year?”


Transcript - Why Your Tax Refund May Be Lower This Year:

And I’m going to add at the end what you can do to ensure that you don’t owe taxes, or you get the refund you expect next year.

First, if your refund is lower than previous years, you are not alone. The IRS is saying that the average tax refund is down $170 this year, based on those who have filed so far.

The latest change in the country’s tax laws lowered the income tax rate for a large majority of Americans. But that doesn’t necessarily mean that you will be paying less in taxes, and it doesn’t necessarily mean you will be receiving a larger refund this year.

 

You may be paying higher total taxes this year because several tax deductions were also taken away. Most notably, the new tax law put a cap on the SALT, or State and Local tax deduction. This hurt a lot of people in high tax states such as California and New York, and high income earners in other relatively high tax states such as Hawaii, Oregon, Minnesota and Iowa.

There were also several other deductions eliminated that involve mortgage and home equity loan interest, moving expenses, alimony, and other miscellaneous expenses that impact a small segment of the population.

 

However for most, the big change to your tax refund is a result from the change in how the IRS calculates the amount of taxes withheld from your paycheck based on the number of withholdings or exemptions that you claim. In 2018, claiming 2 exemptions may not be withholding the same amount of taxes from your paycheck as it would have last year.

That means the taxes that came out of your paychecks may not have been enough to pay Uncle Sam what he wants. And for that reason, you may find that you owe on taxes this year, or that your refund is lower than previous years.

Unfortunately, its too late to do anything about this for last year’s taxes. But if you discovered that you have a big tax bill this year, there is an easy way to remedy the problem for next year, and you should make the change as soon as possible.

Do a google search for the IRS’s tax withholding calculator. Make sure you end up on the IRS’s website for the official calculator.

The link to the official IRS tax withholding calculator is here: https://www.irs.gov/individuals/irs-withholding-calculator

You will want your most recent pay stub handy when completing the calculator, you will enter your personal information such as marital status, number of dependents, taxes withheld last paycheck, and income, and the calculator will spit out the estimated surplus or shortfall of your withheld taxes and the number of withholdings you should claim.

irs_tax_withholding_calculator_example.png

If the returned value is different than what you are currently withholding, go to your employer and ask for a new w-4 form and update your withholdings.

Matt Hylland