Why Your 2018 Tax Refund Might be Smaller

If you’re hoping to get money back on your 2018 tax return, brace yourself. You might be getting a smaller refund this year, or nothing at all.

Your 2018 tax return: What’s going on?

The 2017 Tax Cuts and Jobs Act, which Congress passed in 2017, revised nearly all parts of the tax code. And while it lowered the tax rates for just about every tax bracket, it also limited some common deductions for many taxpayers in the middle class.

Additionally, the Internal Revenue Service (IRS)  recently changed the withholding rates for workers, so what’s deducted from your paycheck is likely to be closer to what you actually owe.

So if the size of your refund this year is disappointing, or you even owe money, it’s probably not that you’re you’re paying more in taxes. It’s more likely that your employer is deducting something closer to the correct amount for taxes.

What changed?

A federal agency called the Government Accountability Office, or GAO, worked with the IRS to revise federal withholding tables for 2018. (You can read more about that here.)

If you work as an employee for a business, you fill out something called a W-4, where you choose the number of allowances you plan to file with the IRS. These can vary based on your personal situation.

A single person with no children, for example, might claim just one deduction. A married person with children might claim multiple allowances. The number of allowances you claim affects how much is deducted from your paycheck for tax purposes.

More about tax refunds

Here’s the thing: There’s actually a difference between your tax rate and tax refunds. (You can read about tax rates here.)

You get a tax refund based essentially on a mismatch between what you owe each year in taxes, and what’s deducted from your paycheck for taxes. Many people typically have more taken out of their paychecks than they actually owe.

Why? The federal government would rather make sure it gets paid than have to collect from tax payers at the end of the year. Think of it this way: The extra money taken out of your paycheck is essentially money you’ve loaned the government until tax time.

In fact, the average refund in 2018 was $2,800, according to the IRS.

In past years, the allowance rates were more likely to result in taxpayers getting money back. Now, according to GAO, they may be closer to what taxpayers actually owe, although slightly more people could end up owing money.

2017 tax cuts: A deeper dive

The 2017 Tax Cuts and Jobs Act provided the most significant tax cuts for businesses and the wealthy, according to experts.

Meanwhile, middle class and poorer taxpayers received more modest tax savings of about $1,600 on average in 2018, according to the Tax Policy Center.

Here are some fast facts:

• The act maintained seven tax brackets, but lowered tax rates for five of them and adjusted income thresholds for many of them.
• The standard deduction—or amount of income free from taxes—for individuals and married couples nearly doubled to $12,000 and $24,000 respectively. So if you are in the lowest tax bracket, you effectively owe nothing.
• The tax cut act reduced popular deductions, such as for mortgages and for state and local taxes.
• For the past year, new withholding rates have provided a slight boost to many people’s paychecks.

You can use this withholding calculator from the IRS to find out if the federal taxes being withheld from your paycheck in 2019 will result in a refund.

Consider Stashing your refund

Plenty of people use their tax refunds to add to savings, to invest, or to fund a retirement account. Stash lets you do all of these things.