Counting on a tax refund? You may owe this year, IRS says
Taxpayers who are counting on a tax refund may actually end up owing, the IRS is warning. In some cases, they may even get socked with a penalty come April 15.
The Tax Cuts and Jobs Act, the tax bill signed by President Donald Trump almost a year ago, lowered tax rates for most people and raised the standard deduction. While that will benefit many taxpayers, others who normally receive tax refunds may find their situation reversed this year, the tax agency warned on Wednesday.
The problem is most likely to hit taxpayers with complicated taxes and those who live in high-tax states like New York and New Jersey, said Lisa Greene-Lewis, a CPA with TurboTax. To avoid an unpleasant surprise on April 15, Greene-Lewis recommends running your information through a calculator that can estimate whether you'll owe or get a refund, like one offered by TurboTax or by talking with your accountant, and then sending an estimated tax payment to the IRS by Jan. 15, if you find out you'll owe.
"People really need understand their overall tax picture, and not assume they are going to have more money when they go to file," Greene-Lewis said. "Don't assume you will get a refund because you heard about the tax law changes -- you could have already seen it in your paycheck."
White House press secretary Sarah Huckabee Sanders promised last year the typical American family would enjoy a $4,000 bump from the tax bill. But because the tax bill lowered tax brackets by 1 percentage point to 4 percentage points, most middle-class Americans are seeing much smaller tax cuts.
The middle 20 percent of income earners -- or people who earn between $42,000 to $67,000 annually -- saw their taxes decline by $800, according to the Institute on Taxation and Economic Policy. That's a benefit of about $33 per paycheck.
Because those lower rates have already been applied by employers, workers have seen those tax cuts in their paychecks -- although it's possible they might not have noticed them, especially if the benefit was modest.
Who, me worry?
The taxpayers who are at most risk of owing -- or even paying a penalty -- include those who itemized in the past but this year plan on taking the increased standard deduction, which doubled under the new law, the IRS said.
About 27 percent of taxpayers itemized under the previous tax regulations, but that could decline to just 10 percent under the new law, according to the Tax Policy Center. About 27 million taxpayers are expected to fall into that category for 2018.
"Complex tax situations"
The IRS is warning that these other types of taxpayers should double-check their tax situation:
- People with "complex tax situations"
- Two-wage-earner households
- Employees with non-wage sources of income
- Workers who received year-end or holiday bonuses
- People who earned stock dividends or capital gains distributions
- Property owners who sold real estate at a profit
"This is especially true if they didn't update their withholding earlier this year," the IRS said.
Paying ahead of time
If you are at risk of an unpleasant surprise on April 15, it's a good idea to send in an extra tax payment before Jan. 15, which is the deadline for fourth-quarter estimated taxes, Greene-Lewis said.
Taxpayers who haven't adjusted their W-4s should do so as soon as possible, which will help them avoid owing the IRS in 2019, she added. Reducing the number of allowances you claim on your W-4 will prompt your employer to withhold more federal income tax, decreasing the likelihood that you'll owe the taxman in April.
Taxpayers who didn't pay enough throughout the year may end up paying a penalty, under IRS regulations.