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What to Do if Uncle Sam Is Late With Your Tax Refund

By Chuck Saletta - Jan 9, 2019 at 12:19PM

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Due to the government shutdown, the IRS may not pay refunds in a timely manner. Here's what you can do about it.

Prior to Monday, it appeared the IRS would not be processing 2018 tax refunds during the ongoing partial government shutdown. That would have been consistent with previous shutdowns. Yet the White House has announced that the IRS will issue refunds even in the midst of this particular shutdown.

Nonetheless, the IRS is operating at dramatically reduced staffing levels, making delays likely. When combined with President Trump's indication that this particular shutdown could last months or even years, that seems a compelling reason not to make your tax refund a major part of your financial plan.

Even in the best of situations, planning for a big refund is a financial mistake. Add this particular wrinkle to it, and it becomes perfectly clear that relying on Uncle Sam to hand you your refund forces you to rely on the government's good will just to get back cash that's already yours. Fortunately, even if you can't get your refund back in a timely manner, there's one thing you can still do to make good use of that money.

Folder labeled REFUND

Image source: Getty Images

What you can do about it

Unfortunately for most of us, 2018 is already in the books, and any excess tax money we've already had withheld for that year is already out of our hands. That said, all hope is not lost, even if the shutdown runs for an extended period and the IRS can't process and pay your refund in a reasonable amount of time.

One avenue still available to you is to indicate on your tax return that you're applying your 2018 refund to your 2019 taxes. Then you can adjust your withholding in 2019 so that your 2018 refund plus the amount withheld for 2019 qualifies you for a safe harbor for your expected 2019 tax burden. To reach a safe harbor, you need to pay enough in taxes in a timely manner for 2019 that you won't face underpayment penalties when you "true up" what you owe by April 15, 2020, even if you wind up owing overall.

There are three safer harbor tests, and one of them is based on your prior-year tax burden. If your adjusted gross income for 2018 was below $150,000 ($75,000 if you're married filing separate returns), as long as your timely tax payments for 2019 are at least as much as your 2018 tax burden, you've met the test. So long as you meet that test, you don't have to pay an additional dime of your 2019 federal income taxes until the tax filing deadline in 2020, even if your income triples during the year.

For example, assume you had $70,000 in income for 2018, and you had $8,000 withheld from your paycheck during that year for federal income taxes. Once you complete your tax forms, you discover that your total federal tax burden for the year came out to $6,500. When you file your taxes, you'll be entitled to a $1,500 refund.

But if the IRS is far behind processing refunds at that point, you can indicate that you are applying your 2018 refund to your 2019 taxes. To do so, simply indicate the amount you're making that election for on line 21 of IRS Form 1040. By applying that $1,500 and adjusting your 2019 paycheck withholding so that you only have an additional $5,000 withheld, you will have made timely payments for 2019 equal to your 2018 tax burden. As a result, you will be covered by the prior-year safe harbor test and won't owe penalties on your 2019 taxes when you file and pay anything else you owe in a timely manner in 2020. To adjust your paycheck withholding, file form IRS form W-4 (or your employer's version of the form) with your employer's payroll department.

What this plan gets you

young woman holding lots of cash and winking

Image source: Getty Images

By planning your taxes this way throughout 2019, you get to make use of your 2018 refund, even if the shutdown is extended and the IRS can't catch up on refund processing. You'll also get bigger paychecks throughout 2019 than you otherwise would have, thanks to having less money withheld to cover the taxes you've already paid.

While this plan will work throughout 2019 to address your 2018 refund, you do need to remember to adjust your withholding again when January 2020 rolls around. At that point, the tax calendar resets for the New Year. Since the available safe harbor tests are based on either your prior-year tax burden or your current-year tax burden, once January 2020 rolls around, you can no longer use a withholding rate based on your 2018 taxes to qualify.

Regardless of how you get there, it's generally a better idea to plan your taxes around what you owe and to aim to be covered by a safe harbor than it is to plan around getting a huge refund. If the prospect of a delayed tax refund due to the shutdown is what spurs you to start planning your taxes that way, then so be it. No matter how you get there, it gives you more control over your own money and makes you less reliant on Uncle Sam's ability to hand your own cash back to you.

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