There’s good news and less-good news for taxpayers this tax season. Americans are getting taxed a whole lot less — about 25% less, on average — and their refunds are up, but only by 1.4% on average, according to new data from H&R Block.
So what happened to all that money the taxman’s supposedly no longer taking?
The tax preparation heavyweight with a national footprint said the answer, at least for its clients, lies in the fact that many people failed to update their withholding rates after a major overhaul of the tax code went live.
About 80% of surveyed Americans didn’t update their W-4 forms in 2018, which made for a bump in their paycheck during the year but a smaller resulting refund, the H&R Block HRB, +1.13% findings determined. The W-4 , a form that employees fill out, tells employers how much tax to withhold from each paycheck. Employees can change their withholdings at any time.
This is the first tax season since the 2017 Tax Cuts and Jobs Act (TCJA) went into effect. Tax liabilities went down all across the nation, ranging from 18% to 29.1% in different states, H&R Block found. Meanwhile, refund changes, compared to last year, ranged from a 6.7% increase to a 6.1% decrease. H&R Block, which filed about 20 million tax returns last year, examined data on return clients filings through March 31.
The states where residents’ tax bills have shrunk the most
The H&R Block findings broke out which states residents had the sharpest average tax liability drops:
• New Jersey, with a 29.1% decline, amounting to $1,972 less in taxes
• Massachusetts, with a 27.6% decline, coming to $1,875 less
• California, with a 27.1% decline, equaling $1,695 less
Those are states with higher taxes on the whole where residents could be crimped by the $10,000 cap on state and local deductions.
Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute said the decreased taxes could relate to the fact that more people suddenly had access to the $10,000 deduction because they were no longer filing under the tax code’s alternative minimum tax. It also could be linked to the increased child tax credit and the new 20% qualified business income deduction, he said.
States where residents are getting the fattest refund increases
• South Dakota, with a $203 increase
• Oklahoma, with a $164 increase
• New Mexico, with a $151 increase
States where refunds shrank the most
• New Jersey, with $179 less
• Maryland, with $176 less
• Washington D.C., with $172 less
Rigney told MarketWatch those smaller refund numbers in higher tax states showed residents there benefitted most from the new decrease in tax rates, versus the deductions built into the tax code.
And an estimated 7.9 million taxpayers will end up owing money this tax season after getting a refund last year, according to a NerdWallet study that extrapolated recent poll results to a national scale. The site also noted a slim number of folks were updating their witholdings. When asking people back in December 2018 if they made any changes, 16% said they did.
Rigney said people were sometimes unsure how to access their W4’s, and then unsure on exactly what to do when getting to the form.
“There’s just confusion on how it all works,” he said.
Filing statistics from the Internal Revenue Service show that by the week ending March 29, the federal government had paid out about $6 billion less, or almost 3%, compared to this time last year. By the IRS tally, this year’s average refund so far is $2,873; that’s $20 bucks lower than last year’s $2,893 average refund at this time.
The federal tax code overhaul, among other things, lowered rates for five of seven tax brackets, just about doubled the standard deduction and doubled the child tax credit.
The new law “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,” Kathy Pickering, vice president of regulatory affairs at H&R Block and executive director of the company’s Tax Institute.
“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,” she said, urging consumer to take a hard look at their W-4’s.
The TCJA also capped the previously unlimited state and local tax deduction at $10,000 — a move that’s had some states crying foul. New York, New Jersey, Connecticut and Maryland, Democratic-leaning states with higher local taxes sued the Treasury Department, arguing the Republican-backed law wrongly punishes them.
Indeed, recent Pew Research findings said 64% of Republicans viewed the tax system as very or moderately fair. Only 32% of Democrats felt the same way.