Though most taxpayers wind up with a refund upon submitting their returns, the 2019 tax filing season hasn't been too kind in that regard. In fact, the average refund is already coming in 8.4% smaller this year than in years past -- and taxpayers aren't happy about it.
A good 41% of filers, however, think tax reform is to blame, according to new data from H&R Block. And technically, they're not wrong. But 21% say they'd blame themselves if their tax refund were to come in lower this year, and they're not wrong, either. In fact, the reason most filers will see smaller refunds this year boils down to a combination of the two.
Tax reform's impact on refunds
The massive overhaul that went into effect in 2018 made a number of changes to the tax code, one of which was lowering virtually all individual tax brackets so that workers would be taxed less on their highest dollars of income. In accordance with that change, the IRS issued new withholding tables that dictated how much tax employers were to remove from workers' paychecks.
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The result? For the most part, workers had less tax withheld, and more money landed in their paychecks. As such, the money that many filers would normally get in the form of a refund was, in fact, already paid to them during the year.
Therefore, to blame the tax code for a smaller refund isn't wrong. But there's a second piece of the puzzle. Folks who saw their earnings go up substantially in the absence of a raise would've perhaps been wise to update their withholding on their W-4 to avoid underpaying taxes in 2018. Substantial underpayments are bad because if you owe the IRS money come tax time and can't pay, you face interest and penalties as a result. Yet only 42% of filers say they knew to submit an updated W-4 following the tax overhaul, according to H&R Block. Therefore, if you wind up with a lower refund this season, chances are, it's something you could've prevented -- but whether you'd actually want to is a different story.
Smaller refunds aren't a bad thing
When you're expecting a major payout from the IRS and it doesn't come through, it's natural to get thrown for a loop. But in reality, a lower tax refund isn't a bad thing. All it means is that you collected more of your earnings up front, as opposed to lending the government that money for nothing in return.
In fact, your goal in paying taxes during the year should be to break even come tax time so that you don't owe the IRS any money, but it doesn't owe you, either. Getting that figure exactly right is next to impossible, which is why in most cases, you're either going to owe some money on your taxes or get some sort of refund. But a smaller refund certainly isn't something to bemoan, provided you prepare for that possibility and don't bank too heavily on a windfall that may not come to be.
Furthermore, owing the IRS a small amount of money isn't a terrible thing, either, as it means you got access to that cash ahead of time. But if you underpay your taxes by many thousands of dollars, you risk racking up penalties. Therefore, if you find this year that you owe the IRS several thousand dollars, be sure to adjust your withholding to have less tax removed going forward. But if you only owe a couple of hundred, you might leave things as-is.
Either way, understand that under the new tax system, your IRS refunds might be smaller for the foreseeable future, and find ways to plan for that rather than stress over it. Oh, and if you're thinking of blaming your tax preparer for that lower refund -- something 9% of filers say they're inclined to do -- think again. Your tax preparer can only work with the information that you, as a client, provide. A good preparer will explore every possible avenue to lower your tax burden, from seeking out valuable credits to itemizing deductions for you if it makes sense to do so. But if the numbers don't add up to a higher refund, there's not much your tax preparer can do.
