Market Overview
“Hey, where’s my tax refund?”
You don’t have to subscribe to Fortune for this story to sound familiar to you.
A 40-year-old electrician from Omaha, Neb., recounted how he usually got enough back in his annual tax refund from the federal government to make an extra mortgage payment.
“But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500,” the article reports. “He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions, and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.”
So if you’re experiencing much the same thing, you’re not alone.
The difference
The tax reform act that took effect January 1, 2018, has not had an even effect on all taxpayers. While almost everyone saw a lower nominal tax rate, a lot of deductions went away. In our electrician’s case, union dues and tools were suddenly non-deductible. Those of us who live in parts of the country that are more highly taxed are finding that the property and sales levies we’ve been using as shields against IRS collections have gone away, leaving some to grumble about being “double-taxed.”
Even so, many naysayers might not actually be hurt by the Tax Cuts and Jobs Act. A lot of it is an optical illusion.
They can’t take it if you didn’t give it to them
The real issue for most of us is withholding.
When you first started your current job, you had to fill out IRS Form W-4. It’s a half-page form with a page-and-a-half of instructions and a two-page calculator worksheet.
Based on your marital status, number of dependents and other factors, it determines how much your employer should take out of your paycheck to ensure that you don’t owe money at the end of the year. The problem is, a lot of people fill it in on Day One and never think about it again. To be fully engaged in your financial health, you should revisit it annually, ideally in the late summer or fall. If that doesn’t appeal to you, at least look at it after every major life event. Do you have a new dependent? Has one of them moved out? Have you been promoted? All of this could affect your tax burden and, thus, how much you should withhold.
Which raises the question: How much should you withhold?
Classically, the answer is that you should shoot for the point where you neither owe the IRS a significant sum nor expect a refund with a comma in it.
“But I count on that refund!” some would exclaim. Perhaps they don’t understand what a refund is in reality. It’s not free money. It’s the money Uncle Sam borrowed from you over the past year and is now paying you back – interest-free.
Moving forward
If you got a refund this year, congratulations! You’re part of a shrinking minority. The Omaha electrician had the right idea: use it to pay down debt. If you’re debt-free, you might want to ask a financial professional how you could put that money to work for you.
If you didn’t get your expected refund this year but you want it back next year, (perhaps not be the wisest financial choice) contact your Human Resources department and re-do your W-4, requesting more withholding.
Possibly, you might be better served by requesting less withholding, although that tactic carries its own risks. The IRS could ding you with underpayment penalties if you’re too aggressive about this. How much is too much? How little is too little? A skilled financial advisor could show you how to ensure that more of your weekly paycheck goes to your future self rather than your Favorite Uncle.
