The size of H&R Block clients’ tax refunds was up 1.4 percent this tax season, while their overall tax liability was down 24.9 percent, the tax prep chain reported, based on data through March 31, 2019.
However, the results varied dramatically by state in this first tax season under the far-reaching changes in the Tax Cuts and Jobs Act. In addition, taxpayers who didn’t adjust their withholdings last year often saw the size of their tax refunds drop on average.
“Tax reform represented the largest change to the tax code in 30 years, and on top of that, the IRS changed withholding tables in February 2018, automatically adjusting take-home pay,” said Kathy Pickering, executive director of The Tax Institute and vice president of regulatory affairs at H&R Block, in a statement. “All these moving pieces have made it hard for people to understand the TCJA impact on their individual situation. Relying on their refund size to determine what tax reform means to them may not only be misleading, but can also put them further at risk of not getting the tax outcome they want when they file next year. Instead, people can get W-4 help from H&R Block in person and online for the refund outcome they want next year.”
H&R Block found that nearly 80 percent of taxpayers did not update their W-4 last year, based on its own data. That led to a bump in the size of their paychecks throughout the year, but it was sometimes more than the decrease in their taxes. Tax liability fell nearly $1,200 on average, but the size of tax refunds was up just $43 on average. An extra $1,156 on average went into paychecks during the year, or about $50 a biweekly paycheck starting in March of 2018. The impact of the withholding changes will be accentuated even more in 2019 because they will be in effect all 12 months of the year.
“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,” said Pickering. “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 $10,000 in state and local taxes, large amounts of unreimbursed employee business expenses, or any life changes.”
Taxpayers who itemized deductions in both 2017 and 2018 had the biggest disparity in paychecks and tax refunds. While their taxes fell an average of 36.6 percent, their tax refunds dropped 22.7 percent instead of going up. They received approximately $50 more in each paycheck than would be needed, if they wanted to keep their tax refund roughly the same size as last year.
“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.”
That 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 declined an average of 28.3 percent. The benefit of lower overall taxes showed up in their paycheck rather than in their tax refund.
Conversely, taxpayers with adjusted gross income of less than $25,000 had their TCJA impact on their paychecks and their tax refunds match the most closely. Their tax liability fell 12 percent on average, while their tax refunds increased 5.4 percent on average, so the remainder of their tax benefit went to their paychecks.
The taxpayer group with the biggest tax refund increase was those who took the standard deduction in 2017 and 2018. Their tax refunds increased an average of 6 percent.
“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.”
Taxpayers in states with high taxes or high property values were especially concerned about the impact of the $10,000 limit on the state and local tax deduction. For 2016, 44.8 million taxpayers claimed $566 billion in SALT deductions, or more than $12,600 on average. Many residents of high-tax states or with high-value property pay much more than $10,000 in state and local taxes.
North Dakota experienced the biggest increase in its average tax refund of 6.7 percent while Washington, D.C., had the biggest decline at 6.1 percent. But in terms of average tax liability, New Jersey had the largest decline of 29.1 percent on average, while Washington, D.C., saw the smallest drop of 18 percent. Even though 13 states, including the District of Columbia, saw their average refund decrease, all 50 states and D.C. had their average tax liability fall anywhere from 18.0 to 29.1 percent.
The tax refund trends for the 2018 tax year are expected to be magnified in the 2019 tax year because the paycheck withholding calculations will be 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 $200 more. The IRS is expected to release a newly revised W-4 in May and is recommending that taxpayers update their withholdings.
