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

[leroyjenkens]

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?

 

[DaveC426913]

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.

 

[leroyjenkens]

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?

 

[russ_watters]

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.

 

[Bandersnatch]

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.

 

[Tom.G]

Here is an article in the Los Angeles Times newspaper about smaller tax refunds. The tax preparers that people hire to do their returns are being trained on how to handle the upset customers!
https://www.latimes.com/business/la-fi-new-tax-rules-confusion-20190125-story.html

"The ? giveth and the ? taketh away!"
(? = the political organization or deity of your choice)

 

[leroyjenkens]

Thank you for the information, guys. And thanks for the breakdown there, Bandersnatch. I had the complete wrong idea of how taxes worked. Thanks.

 

[Vanadium 50]

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.

 

[BillTre]

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.>

 

[DrClaude]

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.

 

[BillTre]

I consider it a possibility, not an opinion.

 

[Vanadium 50]

The amount of tax withheld is determined by the employer, not the government.

 

[jim hardy]

"The ? giveth and the ? taketh away!"

And

" Anything government giveth it must first taketh away. "

 

[Evo]

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

 

[BillTre]

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.

 

[Evo]

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.

 

[Dr Transport]

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.

 

[Tom Kunich]

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.

 

[Evo]

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.

 

[Tom Kunich]

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.

 

[Dr Transport]

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.