The end of October might not be a time when you're typically thinking about your tax strategy, but thinking about tax planning on a year-round basis will make your life easier come Tax Day, usually April 15th.
In any given year about 150 million Americans will file a tax return with the federal government, and the federal government will issue a refund check to about 80% of those tax filers. Over the past three years the average tax refund has ranged from more than $2,700 in 2016 to as high as $3,034 per check issued in 2014.
For some Americans, a fat refund check is a way of forcing themselves to save money for the future. The personal savings rate in the U.S. as of August 2016 was just 5.7%, meaning Americans are saving just half of what they were 50 years ago, and well below the personal savings rate of most developed countries. By overpaying on their federal taxes, most Americans are taking the out of sight, out of mind approach that allows them to build a foundation for their emergency savings or retirement.
However, as has been examined previously, getting a large refund check from the federal government isn't necessarily a good thing. A large refund check means you've allowed the federal government to hang onto money that should never have left your hands in the first place. What's more, the government gets to hang onto your cash on an interest-free basis. If you have debt that carries over from month to month, this extra cash could potentially have been put to better use.
If you get a big tax refund, it could be delayed in 2017
But, if you typically get a big refund and file your taxes as soon as possible to get your big payday, you'll want to be aware of new regulations in place that could delay when you'll get your refund check in the upcoming tax season.
The Internal Revenue Services' news feed isn't exactly "go-to information" for most Americans. Yet, in late August the IRS issued a press release urging taxpayers to review their tax withholding for the 2016 tax-filing season because new fraud-detection tools will be firmly in place and on a mission. That mission is aimed at significantly reducing tax fraud tied to the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC).
According to IRS estimates, between 21% and 26% of EITC claims are paid in error each year. In 2015, the IRS made $15.6 billion in erroneous EITC payments per the Treasury Inspector General for Tax Administration.
Specifically, the press release notes that while the IRS will begin accepting tax returns on-time in 2017, and it'll generally be sticking to its normal timeframe of issuing most refunds in 21 days or less, the newly passed Protecting Americans from Tax Hikes Act (PATH) requires the agency to hold a taxpayers' entire refund until at least mid-February if they're claiming the EITC or ACTC. Keep in mind, even if only a small portion of your refund comes from the EITC or ACTC, the IRS is still required by PATH to withhold your entire refund check. This extra withholding time should give the IRS an opportunity to more thoroughly review EITC and ACTC credits on a case-by-case basis in an effort to reduce fraudulent payments and identity theft. But for lower- and middle-class Americans counting on their refund, a surprise could await.
The recommendation from the IRS is to review your tax withholding status and alter it if need be, which can commonly be done with Form W-4. By altering your withholding status you can change how much, or how little, the federal government withholds from each paycheck. If you're expecting a large refund but you also know you qualify for either the EITC or ACTC, lowering your tax liability now to boost your paycheck for the remainder of the year could be a smart move since your refund will probably be delayed.
The IRS' press release also suggests that certain tax refunds that have nothing to do with the EITC or ACTC could be delayed based on its newly implemented screening tools, In other words, give strong consideration to adjusting your W-4 to collect more of your refund now rather than having to wait patiently to get a check from the federal government.
More reasons to consider reviewing your W-4
Refund delays aren't the only reason to consider adjusting your tax withholding, either. Big changes in your life can dramatically alter your effective tax rate, which may merit an adjustment to your W-4.
For example, getting married or divorced can have big tax implications. Married filers are privy to a number of tax breaks and deductions that single/divorced filers don't get. If you've recently been married or gotten divorced, you may want to consider adjusting your tax withholding to reflect your lower or higher tax responsibility.
Something similar could be said about purchasing a home. Buying a house or condo often comes with some juicy tax breaks that can include mortgage interest on your loan as well as mortgage points paid to obtain the loan. These fees could mean big deductions come tax time, which in turn could make it worthwhile for you to consider paying less in taxes to the federal government now and collecting a bigger payday until the end of the year.
Other considerations include having a baby, being unemployed for part of the year, and getting a second job, which can all affect your tax liability.
The threat of the IRS delaying refunds to millions of tax filers in 2017 just might be enough of an impetus to get working Americans to proactively adjust their tax withholding to put more money into their pocketbooks now rather than later.