This is turning out to be a difficult year for a lot of taxpayers.
Major tax law changes that took effect last year are impacting people’s beloved refunds. The IRS reported that, as of Feb. 1, refunds are down 8.4 percent. The average refund was $1,865, compared with $2,035 for the same period a year ago.
For some, a significantly lower refund amount than in previous years has come as a shock — and they are livid.
“As a retiree on a fixed income, I depend on my tax refund for some of my rainy-day fund,” wrote Virginia resident Carolin Ringwall. “My refund is $1,500 less than last year, even though everything else is the same.”
The new law increased standard deductions but removed personal exemptions, and it limited or discontinued certain other deductions. For instance, the total combined deduction for sales, property, and state and local taxes is now limited to $10,000 ($5,000 if married and filing separately).
“The updated federal-tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law,” the IRS said in a statement. “This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.”
Here’s the problem: Any increase may have been so small that people didn’t realize they were getting more money in their paychecks and that it would result in much smaller refunds when they finally filed their returns.
And because the withholding tables couldn’t fully factor in some of the changes, some people may not have had enough money taken out of their paychecks or retirement income to cover any taxes due, according to the IRS. The agency had issued warnings to taxpayers to check their withholdings.
Some taxpayers are finding that they owe much more than they can afford to pay.
“I’m estimating a huge tax bill,” one reader wrote during my weekly online discussion. “Our taxable income is much higher than last year, because we lost about $6,000 in deductions and $16,000 in personal exemptions. We lost about $2,000 in tax credits. And, we had about $2,000 less income tax withheld. So, instead of last year’s tax bill of $1,500, I think our tax bill is going to be over $15,000.”
If you owe the IRS a significant amount of money, here are some things you should and shouldn’t do.
• File your return on time, even if you can’t pay in full. There are two pesky penalties you want to avoid — one for filing late, and the other for failing to pay on time.
• Pay what you can. Unlike a lender that may kick back a partial mortgage payment, the IRS will take what you’ve got. If you can’t pay the full amount, file your return by April 15 anyway, and pay as much as you can to avoid penalties and interest.
• Don’t confuse filing an extension with extra time to pay. Your request for an extension does not mean that you get more time to pay. An extension applies only to filing your return.
• Apply for an installment plan. You can arrange to make monthly payments if you owe $50,000 or less in combined tax, penalties and interest, and have filed all required tax returns. For more information on how to apply for a payment plan, go to irs.gov and click the “pay” link.
If you’re experiencing a financial hardship, you can request that your account be placed in “currently not collectible” status. If approved, the IRS will temporarily delay collection until your financial condition improves. However, interest and penalties will still accrue.
• Don’t fall for a debt-relief scam. No, it’s unlikely the companies you hear advertising on the radio can get your tax debt reduced for a fraction of what you owe. Contact the IRS at 1-800-829-1040 to discuss various payment options.
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