Is your tax refund smaller this year?
You’re not alone. As of Feb. 1, the IRS had issued 4.67 million refunds this year, compared to 6.17 million at the same time last year. The average refund was $1,865, down from $2,035.
But tax experts say, most people are still paying less in taxes compared to last year.
How is that possible?
The Republican/MassLive.com talked to two certified public accountants — John Kilcoyne, a partner at Solar & Kilcoyne in Leominster, and Andrew Schwartz, a founder of Schwartz & Schwartz in Woburn — to understand what is going on.
“All things being equal, the rates were a little less, taxes did go down a little bit, but unfortunately refunds went down,” Kilcoyne said
The root of the change is in the federal tax overhaul that Congress passed in December 2017.
The bill reduced the tax rate for most taxpayers. So the IRS wrote new withholding tables, which give guidance to employers on how much money to withhold from workers’ paychecks.
For most people, the amount of their withholding went down, so they received more take-home pay each time they got a paycheck.
A refund is given when someone pays the government more during the year than they actually owe in taxes, so the government returns the extra money. In this case, the amount employers were withholding based on the new tables tended to be closer to the amount people actually owed. So at the end of the year, the government did not owe as much in refunds. In some cases, the taxpayer might have owed a bit more.
“They reduced the withholding by a little bit more than they should have been reduced by, in hindsight,” Schwartz said.
Schwartz said the most important number for people to look at is not the size of their refund, but their total tax liability for the year – which in most cases went down.
Kilcoyne said most accounting firms try to notify customers when there is a big change in federal tax law, and this one was in the news.
“It was not a total surprise or total shock unless you had your head in the ground for 12 months,” Kilcoyne said.
But Kilcoyne noted that people often do not question when they are seeing a slight increase in their take-home pay, and many taxpayers were not aware of what it would mean in February, March or April when they get their refunds.
As is the case with any tax change, each person’s personal circumstance is different. Some taxpayers could see their total tax payments increase, based on changes that Congress made to deductions. Others may see no difference.