Tax reform took effect during the 2018 tax year, and now that tax season is here, millions of Americans have hoped that they'd save on their tax bills as a result. Yet early indications show that the size of refunds on average is less this year than it's been in past years, and many taxpayers are complaining that tax reform didn't deliver on its promises of reducing taxes.

It's easy to blame refund shrinkage on the federal government, and the IRS is used to getting complaints. But in this situation, the real blame belongs to taxpayers who didn't understand that the massive changes in tax law might make it smart to re-examine their own role in determining the size of their refunds -- by looking at their withholding.

Refund check from U.S. Treasury on top of a 1040 form.

Image source: Getty Images.

The size of the problem

The latest figures from the IRS show that the average tax refund thus far this year is $1,865. That might sound like a lot, but it's down from the typical $2,035 tax refund taxpayers got at this time last tax season. In addition, the IRS has issued only about three-quarters as many refunds as it did in early 2018 for the 2017 tax year.

For the vast majority of people, the main determining factor in how big your tax refund will be involves how much money gets withheld from your paychecks over the course of the year. If you have a lot withheld, then your refund will be larger. Have less taken out, and your refund will shrink, or you could even owe taxes at the end of the year.

It's true that the government is responsible for coming out with withholding tables, and those tables did in fact change as a result of tax reform. But the changes to the tables are only half of what caused withholding amounts to change -- because it's always in your power to file Form W-4 with your employer. When major changes occur -- whether they're specific to your personal life or more general in nature -- forgetting to file a new W-4 runs the risk of exactly the kind of unexpected change to the amount of your refund that's happening now.

The limitations of withholding tables -- and how Form W-4 can help

Form W-4 is also known as the Employee's Withholding Allowance Certificate, and although it's short, it provides essential information to your employer and the IRS. By letting you select how many withholding allowances to claim as well as the appropriate filing status for your return, Form W-4 tells your employer how to use the IRS withholding tables to figure out how much money to take out of each paycheck to go toward your federal tax bill.

At first glance, Form W-4 looks simple to use. But things get complicated in a hurry, because in order to use the form properly, you need to fill out the worksheets that go with it. In particular, there are two primary worksheets that address withholding: one covering joint filers in which both spouses work, and one dealing with deductions, credits, and other tax breaks. When anything changes with your tax situation, it's important to update your W-4 withholding, or else the incorrect amount will get withheld going forward.

What happened to millions of taxpayers is that they didn't update their W-4 forms. Instead, they left their withholding allowances unchanged -- even in the face of tax law changes that in many cases hurt them from a tax perspective. Many of those who've said that their refunds have shrunk pointed to factors like the limitation of state and local tax deductions, the elimination of miscellaneous itemized deductions, and changes in the size and eligibility for other tax breaks. If you run those changes through the W-4 worksheets, the form would suggest reducing your withholding allowances and allowing the IRS to boost the amount withheld from your paychecks.

How to change your withholding

It's too late to do anything about the 2018 tax year, but if you're having trouble with your refund, making changes to your withholding allowances in 2019 could be the smartest move you can make. Running the numbers to see how tax law changes affect how many withholding allowances you should claim could get the size of your refund back to what you'd more typically expect.

Tax reform affected total tax liabilities in different ways for various taxpayers. But even if your total tax bill went down, it's possible that your tax refund could be smaller -- if your employer withheld less in taxes and thereby boosted the size of your paychecks over the course of the year. That's not necessarily bad if you're prepared for it, but if you're not happy, file a new Form W-4 with your employer and make sure it accurately reflects your tax picture for 2019 and beyond.