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Delaney and Delaney Legal Blog

Tuesday, January 16, 2018

Don't Expect Bigger Tax Refunds Next Year

submitted by Brian J. Delaney, Esq.

In light of the new tax plan that went into effect on January 1, many Americans are expecting a larger tax refund when they file next year. They shouldn't plan on it and here's why: The IRS just released revised tax withholding schedules last week and it's possible people will be underpaying their taxes.  

It's important to understand how the federal income tax system works. Form 1040 calculates how much tax is due.  Your refund amount is irrelevant. If you receive a $5,000 federal tax refund, then this simply means your withholdings exceeded the tax owed by $5,000. (See Line 63 of your 2016 Form 1040 for total tax due. If your withholdings and tax payments were higher, then you got a refund. If they were lower, than you owed an additional tax.)

Some people love getting (and spending) a big refund check, but it's really an interest-free loan to the government. Instead of getting the big refund in April, a simple change in the withholding amount can increase each paycheck by hundreds of dollars.

Since the IRS had to rush these new withholding schedules out as soon as possible, it is not entirely clear how accurate the figures are. Additionally, Democrats are accusing the current administration of manipulating the withholding schedules to artificially increase workers take home pay by under-withholding the federal income tax, which, in turn, may reduce or eliminate tax refunds next year.  

As the IRS, employers, and tax professionals attempt to figure out how to implement this tax plan competently, you should be prepared for all scenarios come next April, including writing an extra check to Uncle Sam.

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