H&R Block data shows taxes down 25 percent due to TCJA impact
KANSAS CITY, Mo.,
“Tax reform represented the largest change to the tax code in 30 years, and on top of that, the IRS changed withholding tables in
Taxes down 25 percent, but refunds roughly flat, so where did the money go?
Given the 24.9 percent decrease in tax liability for H&R Block clients, taxpayers want to know where that money went. Survey analysis from H&R Block uncovers an issue: Nearly 80 percent of Americans did not update their W-4 last year, resulting in a bump in their paychecks throughout the year, sometimes more than their taxes decreased. Now, H&R Block data reveals just how much the TCJA impacted taxpayers’ paychecks.
With tax liability down nearly
“We’ve been encouraging people to update their withholding since February of last year, so that they can balance the benefits of tax reform the way they want. For some, that’s getting it all in a larger tax refund, for others it’s getting it in their paychecks, spread out throughout the year,” said Pickering. “This is especially important for anyone who lost some tax benefits, like if they have more than
When tax liability change outpaces refund change
Not only does the H&R Block data show just how much the TCJA impact showed up in paychecks versus refunds, but it also shows which taxpayers experienced the biggest discrepancy between those two parts of their tax equation. Of the examined groups, it was those who itemized in both 2017 and 2018 who had their paychecks and refunds mismatch the most. Although their tax dropped on average 36.6 percent, instead of going up, their refunds actually dropped 22.7 percent, making theirs the most dissonant TCJA impact experience. They received about
“It’s reasonable to assume that a tax cut would mean your refund will increase, but that’s not necessarily the case,” said Pickering. “The IRS updated how employers calculate how much tax to withhold from paychecks, which means you could have been getting all your tax cut – and then some – in your paychecks.”
This was also the case for homeowners who deducted their mortgage interest in both years. Their refunds dropped an average of 11.8 percent. But their tax liability also dropped on average by 28.3 percent. The benefit of lower overall taxes showed up in their paycheck instead of their refund.
On the other hand, taxpayers with adjusted gross income of less than
The group with the largest refund increase were those who took the standard deduction in 2017 and 2018; their refunds increased 6 percent on average.
“Either surprise – getting a larger or smaller refund than expected – can be a problem when you’ve been planning for and expecting something different,” said Pickering. “If you’re not happy with your refund, the important thing is to update your withholding so the same thing doesn’t happen to you again next year.”
State outcomes depend more on personal situation than geographic location
People living or working in states with high taxes or high property values have been particularly concerned about the impact of tax reform’s
North Dakota saw the largest increase in average refund of 6.7 percent while Washington, D.C., saw the largest drop at 6.1 percent. However, when looking at average tax liability, New Jersey had the largest drop of 29.1 percent on average, while Washington, D.C., saw the smallest decrease of 18 percent. Even though 13 states, including D.C., saw their average refund decrease, all 50 states and D.C. saw their average tax liability decrease anywhere from 18.0 percent to 29.1 percent.
TCJA impact on 2019 tax refunds set to be even more extreme
The refund trends from this year are set to be magnified for the 2019 tax year because the paycheck withholding calculations are in effect all year. Failing to update a W-4 could mean that someone who had a refund drop this year could see their refund drop by even more next year: on average
H&R Block tax professionals provide W-4 planning for their clients when they file their 2018 tax returns. Because a W-4 form requires a lot of the same information that goes on a tax return, and because updating a W-4 at the start of the year stretches out the changes over a longer period, tax season is an opportune time to update a W-4.
People can also get help understanding their TCJA impact with a tax professional face-to-face in an office, virtually through Tax Pro Go, or online with Ask a Tax Pro. Or they can learn more through H&R Block’s tax reform resource online or in the DIY online help center, found throughout the DIY online product.
H&R Block analyzed federal tax returns for prior H&R Block clients completed through
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Source: HRB Tax Group, Inc.