ByHanna Horvath, CFP®
Published February 12, 2019|2 min read
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Filing your taxes is not fun — in fact, it can be pretty painful.
This year may be more painful than others. Across the country, Americans are complaining about getting a smaller tax refund.
The IRS reported that the average refund this year is $1,865 — down 8.4% from 2018, which had an average return of $2,035.
So why are refunds lower this year?
The tax code went through major changes with the passing of a tax reform law in 2017. The biggest was a shift of tax brackets (learn more about how the new tax brackets affect you here.) The IRS also changed the withholding brackets for employers, dictating how much human resources holds back from your paychecks each month.
For the most part, in 2018 employers withheld less from their employee’s paychecks, which usually led to more money for workers each pay period. But less withholding means less money given to the IRS, which can mean lower returns.
“When taxpayers get more money back in their paychecks, they think the tax law just lowered tax brackets,” said Lisa Lewis, certified public accountant and tax expert for TurboTax.
People may have thought this meant bigger paychecks and a bigger refund, but that may not be the case, Lewis said.
You can use the IRS withholding calculator to make sure you're setting aside the right amount for taxes.
Though the new tax law increased the child tax credit and standard deductions, it also limited deductions for mortgage interest deductions and state and local taxes and eliminated deductions for alimony. It also removed the personal exemption, which is the amount of money you can deduct for yourself and for each of your dependents.
“The law was advertised that you could deduct more than you really could,” said Monica Dwyer, certified financial planner and vice president of Harvest Financial Advisors. “It will be a shock. Some people will get back less.”
There may be a good chance your refund may be significantly lower than last year, or you may not get one at all. That’s why you should file as soon as possible. Once you figure out how much you’ll be getting back or how much you owe, you can plan ahead.
If you haven’t filed yet, Lewis said you can take measures to reduce the amount of taxes you owe, like contributing to an individual retirement account.
If you end up owing money, Lewis said, "You still have time. You don’t have to pay until April 15. There are also extensions you can apply for.”
If you do get a tax refund, it’s important to spend it smartly. Here are six responsible ways to handle your refund.
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