Your tax refund might be less this year. Here’s why and what to do about it.

The 2017 tax overhaul’s unpleasant surprise: Skinny refunds

The Republican tax overhaul of 2017 promised lower taxes for large portions of Americans. But if you were counting on extra cash from a fatter-than-usual refund, think again. As the New York Times reported recently, some early filers have been shocked to find their refunds actually dropped compared with previous years. In some cases, people owed taxes when they’d normally been getting money back. The average refund as of Feb. 15 had dropped 16.7% compared with 2018, according to the IRS, although it was back up a week later.

It remains to be seen whether the apparent recovery in refund amounts will continue, or if they will drop again. But in either case , what could be the reasons for the unexpected refund amounts taxpayers have been reporting? First of all, it could be because certain deductions got axed. For example, the new tax law now caps the deduction for state and local taxes at $10,000. (But not all tax breaks were scrapped: the standard deduction nearly doubled, and there’s a new “qualified business income” deduction for some business owners and self-employed folks.)

These rude refund surprises could also be the result of less money being withheld from people’s paychecks throughout the year. In an interview with CNBC, Rep. Kevin Brady of Texas, an author of the tax bill, seemed to suggest that the lower refunds were by design:

“Our thinking was in tax reform, most families live paycheck to paycheck. It’s best to drive that into their paychecks last year, starting in February, in March, rather than delaying it a year,” Brady said.

In other words, your overall tax bill might be lower, and that savings already got to you via your  monthly paychecks. (You’re forgiven if you didn’t notice. For middle-income families, it came out to about $36 per biweekly paycheck.)

So lower refunds are actually a good thing, right? Maybe. The problem here is that if you didn’t know to expect a smaller check from Uncle Sam, you could have already spent your tax-law windfall without realizing it. Tax withholdings often function as a kind of invisible savings plan. And when those “savings” stop happening without your knowledge, budgets can go haywire.

Since we can’t go back in time to fine-tune our tax withholdings and start saving a little more each month of 2018, what options are left? Here are a few suggestions:

Rethink refund spending plans

Try to hold off on discretionary expenses until you’ve finished your taxes and know exactly what your liability is going to be. If you normally count on your refund to pay for things like an annual vacation, or a new spring wardrobe, consider a plan B. Maybe you can do a staycation this year, or stick with last year’s clothes.

Take extra care filing your taxes

Because of all the changes in deductions this year, even tax preparers are scrambling to wrap their heads around the twists and turns. So budget a little extra time for taxes. More specifically, if you live in a state that requires you to take the same kind of deduction on your state return as you did on your federal, you’ll want to think carefully about whether to take the itemized or standard deductions. Although the standard deduction has doubled this year for federal purposes, that deduction could work to your detriment when taken on your state return; run the numbers both ways to see what pays overall.

Adjust your W-4 withholding

Aim to withhold from each paycheck as close to the amount you owe as possible, so you won’t end up with sticker shock come tax time 2020. Use the IRS withholding calculator to perform a checkup. And remember: Your tax withholdings shouldn’t be a secret savings account. The IRS doesn’t pay interest, so  don’t let the government hang onto your money all year, just for the pleasure of getting a whopping check at tax season. For a better kind of delayed gratification, take the bump in your paycheck and sink that money into an IRA, where it will really grow.

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