Why is my tax refund lower this year than last year?

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In summary, the conversation discusses the decrease in the speaker's tax refund from 2017 to 2018 despite making more money. The reason for this decrease is due to the changes in tax rates and withholding calculations. The employer assumes a certain amount of yearly earnings and withholds taxes accordingly, but if the actual earnings differ, there may be an over or underpayment of taxes. The speaker also notes that political factors may have played a role in the decrease of tax refunds. However, it is important to keep political opinions out of the discussion and focus on the factual aspects of the situation.
  • #1
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I made $29,615 in 2017 and my tax return was $838.
I made $36,892 in 2018 and my tax return is $592.
I didn't go up a tax bracket. The only thing different is I made a little more money. Why did my refund go down? Any ideas?
 
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  • #2
Are those numbers gross or net?

Your paycheques are based on a predicted pay, and the tax held back is calced from that. So, they often calc pessimistically. Once the numbers are in, you may have been taxed more than necessary, so you get more back.

Also, taxes change.
 
  • #3
The numbers are gross. They're the numbers straight off my W-2's.
I just noticed that in 2017, I made $29,615, and the federal income tax withheld was $3,256.
In 2018, I made $36,892 and my federal income tax withheld was $3,386.
If I calculate, proportionally, how much my income tax withheld for 2018 should have been, based on what was withheld in 2017, I get $4,056. So maybe my taxes withheld were just too low in 2018?
 
  • #4
leroyjenkens said:
I made $29,615 in 2017 and my tax return was $838.
I made $36,892 in 2018 and my tax return is $592.
I didn't go up a tax bracket. The only thing different is I made a little more money. Why did my refund go down? Any ideas?
First of all, that's a "refund", not a "return". "Return" is the name of the packet of forms sent to the government.

But the reason they didnt go up as much as expected is that tax rates were lowered for 2018.
 
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  • #5
Disclaimer: I'm not in the US. But I'm bored and I think I'm reading the numbers correctly.

In 2017 you earned 29'615. The standard deduction in that year was 6'350, personal exemption was 4'050. The taxable income comes down to 19'215. Of that, you owed 10% of the first 9'325, plus 15% of the rest. Which is 933 + 1'484 = 2417. Your employer withheld from your paychecks 3'256, which is 839 too much, and which you were refunded.

In 2018 you earned 36'892. The 2017 tax reform increased standard deduction to 12'000 and eliminated personal exemption. The taxable income was 24'892.
Of that you owed 10% of the first 9'525, plus 12% of the rest. Which is 953 + 1'844 = 2'797. 3'386 was withheld, which is 589 too much, and which you were refunded.

In both cases the few dollars difference in my calculations probably comes from rounding errors, but otherwise everything looks correct.

Each time you get a refund, it means that too much taxes were withheld. This usually means that the employer assumes that you earn a certain amount in a year, calculates taxes owed, and deducts 1/12 of this amount from the monthly paycheck towards taxes. If the assumption is in any way off the mark, because e.g. there was a period in the year when you weren't employed, or were employed elsewhere, which made you make less in a year than the assumed amount, you end up with too much taxes withheld and get a refund. The particular reason is hard to guess without knowing the specifics of your situation, or being familiar with what exactly goes into calculating the projected earnings.

If you managed to earn exactly the assumed amount, you'd get no refund, because the taxes withheld over the year would be exactly what you'd end up owing.
If you somehow managed to earn more, you'd have to pay extra taxes when filling the tax return.
But employers universally assume the highest possible earnings (I don't know, maybe that's the law), so that employees don't have to deal with a large lump sum to pay come the end of the fiscal year. Instead, the employees tend to pay a bit too much in taxes each month (or week, or whatever), and then get a refund.What I'm saying is, ask yourself what could be the reason your employer(s) in both 2017 and 2018 could be making inaccurate predictions, and why the prediction became more accurate in 2018.
Myself, I'm familiar with my personal situation, and know exactly why the refunded amount I get was overtaxed. But maybe the tax code around here is more transparent than in the US, I don't know.
 
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  • #7
Thank you for the information, guys. And thanks for the breakdown there, Bandersnatch. I had the complete wrong idea of how taxes worked. Thanks.
 
  • #8
Tom.G said:
smaller tax refunds.

In principle, this means taxes are easier to predict than in the past. I think as a practical matter, it's very individual-dependent. This year, I was way, way off.
 
  • #9
Or, it may be political intrigue:
I have also read that people in the Republican administration (who run the IRS) wanted tax payers to receive more take home pay in light of the recent (GOP driven) tax cut.
As a result of reduced payroll deductions, peoples's returns are tending to be smaller.

<Moderator's note: text edited to remove political opinions.>
 
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  • #10
Please keep political opinions out of this discussion (and out of PF as a whole!).

Any political aspect of the question must concern facts only.
 
  • #11
I consider it a possibility, not an opinion.
 
  • #12
The amount of tax withheld is determined by the employer, not the government.
 
  • #13
Tom.G said:
"The ? giveth and the ? taketh away!"
And

" Anything government giveth it must first taketh away. "
 
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  • #14
Vanadium 50 said:
The amount of tax withheld is determined by the employer, not the government.
No, actually, the amount of tax withheld is determined by the employee. The employee, usually when first employed, fills out a form W-4 and selects the number of exemptions, which is the basis for the amount the employer withholds for Federal and State income Tax. The more exemptions you take, the less tax is withheld. At any time, you may request to change the amount withheld by filing a new W-4. Most people forget that they even filled this form out because it was in all of the initial paperwork they did when they got hired.

https://www.irs.com/articles/what-is-tax-form-w4

https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-a-w-4-form/L2NapDzX2
 
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  • #15
I read this in a AARP e-mail I got today:
According to IRS spokesperson Eric Smith, updates to the federal tax withholding tables, which determine how much tax an employer takes out of each paycheck, along with other major changes, such as the elimination of personal exemptions, mean that many taxpayers have been caught off guard with smaller-than-expected refunds — and some may even be facing an unexpected tax bill.
 
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  • #16
BillTre said:
I read this in a AARP e-mail I got today:
I just had a change in finances, so had to do a new W-4, and had to guess at how many exemptions to claim, the exemptions/allowances on the W-4 is not to be confused with the personal exemptions which were eliminated from the form 1040 for your Federal tax return. The W-4 instructs your employer what to withhold from your paycheck, or 1099, (however you get your taxable income). All your W-4 asks is for you to select a number of your choice, hopefully based on number of dependents, but not necessarily, it does not show you the dollar amount that will be withheld, forcing you to guess. And their calculator is worthless if you have income other than straight wages. It told me to claim 23 exemptions.
 
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  • #17
I have always claimed fewer deductions during the year to avoid having to pay at the end. For a while I was claiming married, tax at single rate which also ensured I didn't have a bill due on April 15th.
 
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  • #18
Evo said:
No, actually, the amount of tax withheld is determined by the employee. The employee, usually when first employed, fills out a form W-4 and selects the number of exemptions, which is the basis for the amount the employer withholds for Federal and State income Tax. The more exemptions you take, the less tax is withheld. At any time, you may request to change the amount withheld by filing a new W-4. Most people forget that they even filled this form out because it was in all of the initial paperwork they did when they got hired.

https://www.irs.com/articles/what-is-tax-form-w4

https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-a-w-4-form/L2NapDzX2
In 2017, the IRS sent a letter to every income earner stating that they were changing their policy on withholding. They intended to automatically set the withholding to very close to the expected tax owed. If you wanted some other value you had to go to your company HR department and change it to whatever you wanted.

The idea was that the IRS expends millions of dollars every year returning money to taxpayers and they wanted to reduce this to as close to zero as possible.
 
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  • #19
Tom Kunich said:
In 2017, the IRS sent a letter to every income earner stating that they were changing their policy on withholding. They intended to automatically set the withholding to very close to the expected tax owed. If you wanted some other value you had to go to your company HR department and change it to whatever you wanted.

The idea was that the IRS expends millions of dollars every year returning money to taxpayers and they wanted to reduce this to as close to zero as possible.
It's still based on a guessing game for the employee, for example, do I claim single and 1 or single and 0? How much will be withheld? My friend claimed single and zero and got a federal return last month of over $2,500, he took the standard deduction (he did not itemize). I suggested that he claim at least himself, and he said no, he likes the big surprise return, and yes he knows he's allowed the government to use his money all year, but he would have just spent it.
 
  • #20
I don't understand - what do you need to guess at? If you want to change to a different deduction you may. Otherwise just leave it as they set it. Even if you end up owing money unless you had a windfall of some sort you would owe very little.

My brother retired from a civil service job last year. He had saved up an entire year's worth of paid time off and they gave this to him without any withholding and then he was completely distraught and blamed the taxes he owed on the administration and not his stupidity for spending that entire wad on a new high end car.
 
  • #21
My CPA just told me to claim 0 deductions and for my wife to do the same, that way I should come out about even next year. He even wants to see our pay stubs mid year to do an adjustment.
 

1. Why did my tax refund decrease this year compared to last year?

There could be several reasons for a decrease in your tax refund. One possible reason is changes in your income or deductions. If your income increased, you may have moved into a higher tax bracket, resulting in a smaller refund. Additionally, if you had more deductions or credits last year, such as mortgage interest or charitable donations, this could also affect your refund amount.

2. Will my tax refund always be the same amount every year?

No, your tax refund can vary from year to year depending on changes in your income, deductions, and tax laws. Your refund is determined by the amount of taxes you have overpaid throughout the year, so any changes in these factors can affect the final amount.

3. Can I do anything to increase my tax refund?

Yes, there are several things you can do to potentially increase your tax refund. One option is to contribute more to tax-deductible accounts, such as a 401(k) or traditional IRA. You can also claim additional deductions or credits, such as for education expenses or energy-efficient home improvements. However, it's important to note that these strategies may not necessarily result in a higher refund, as they depend on your individual tax situation.

4. What changes in tax laws could affect my refund amount?

Changes in tax laws can impact your refund amount. For example, if there were changes to tax rates or deductions, this could affect the final amount you receive. It's important to stay informed about any changes in tax laws and how they may affect your tax return.

5. Why did my tax refund decrease even though I didn't make any changes to my income or deductions?

Even if you didn't make any changes to your income or deductions, your refund could still decrease due to changes in tax laws or withholding rates. The government periodically adjusts tax brackets and rates, which can affect the amount of taxes withheld from your paycheck. This could result in a smaller refund, even if your income and deductions remained the same.

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