5 Reasons You May Not Be Getting a Tax Refund
In December 2017, the Tax Cuts and Jobs Act (TCJA) was passed which was the most sweeping tax legislation the US has had since 1986. The current tax season is the first time we’re filing returns under the new rules. While the reform simplified our tax system, some changes may cause a tax surprise when you file your 2018 return. Here are a few reasons you may not be getting your usual refund:
1. Withholding Tables were adjusted
Withholding tables are the guidelines employers use to know how much they should withhold on your behalf for Federal and state income taxes. You let your employer know your desired Federal withholding by completing a Form W-4. If you don’t know it by its name, you might recognize it by viewing it here. The TCJA caused new withholding tables to be generated to take into account an increased standard deduction, elimination of personal and dependency exemptions, and changes to our marginal tax rates. You can read more about some of these changes below. If you did not adjust your withholding or make additional estimated tax payments to compensate for these changes, you may find out you under withheld. The good news is the IRS is waiving its penalty for many taxpayers whose withholding and estimated tax payments fell short of their total tax liability for 2018.
2. Personal and dependency exemptions were eliminated
Previously, you could claim an exemption for yourself, spouse, and any dependents in the amount of $4,050 per eligible person. For a married couple and their five kids, this was the equivalent of a $28,350 reduction in their taxable income. The TCJA eliminated this exemption impacting large families the most. At the same time, the standard deduction was increased to try to mitigate this problem. For a married couple, the standard deduction amount increased to $24,000 from $12,700. For many families, their tax situation was not altered by this change while larger families may feel a pinch when they file their returns.
If you’re accustomed to itemizing your deductions, the following changes may contribute to reduced deductions and thus a larger tax bill.
3. State and local (SALT) income, sales, and property taxes are capped
The TCJA implemented a $10,000 cap on the amount you can deduct for any state and local income, sales, and property taxes paid. Who will be most impacted by these changes? People living in high tax states and high-income earners. If you live in any of the following states, you’ve likely already heard about this on the news as you’re considered to be in one of the 10 states with the highest income tax rates. (DC, CA, HI, IA, OR, MN, NJ, NY, VT, WI)
For those of you this applies to, you may find yourself taking the standard deduction this year as opposed to itemizing your deductions because of the SALT cap.
4. Miscellaneous deductions are gone
Many clients have already felt the impact of this change given that our investment advisory fees are no longer deductible on your personal return. Previously you likely reached out asking for how much you paid to us for investment advice or you looked on your Form 1099 Composite. The TCJA eliminated miscellaneous itemized deductions which included not only investment advisory fees but also unreimbursed employee expenses, tax prep fees, union dues, and job education expenses. The only way you can deduct our fees going forward is if some of our fees are attributable to your business and thus considered a business deduction.
5. Mortgage interest is capped
Taxpayers are still allowed a deduction for interest paid on a first and second home mortgage up to $750,000 for new debt incurred. Prior to this, you could deduct the interest on a mortgage up to $1 million dollars. If you obtained a mortgage exceeding the new $750,000 limit prior to December 15, 2017, you need not worry as you are grandfathered in under the old rules. Additionally, the mortgage interest deduction for a home equity line of credit (HELOC) or home equity loan is gone unless you use the loan to buy, build or improve your home. Prior to the TCJA, if you used your HELOC to finance a new car purchase, you could deduct the interest you paid on it. While you can still use your HELOC to do this, you will no longer receive a tax benefit by doing so.
If you are one of the unlucky taxpayers that owes taxes when you were expecting a refund, let us know. We’re happy to help you determine how much you should be withholding based upon your tax situation or help coordinate this with your accountant.