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Wait, I have the IRS?
The first reporting period under the new federal tax law is surprising, confusing – and sometimes scary – for some Americans, especially those who are used to recovering government money.
Take Andy Kraft and Amy Elias from Portland, Oregon. The couple had become comfortable with a small refund each year, a few hundred dollars or more. They then discovered that they owed $ 10,160 this year.
"I'll never forget this moment, I thought," We look good, "then we added the next W-2 and my jaw dropped to the ground," said Kraft. "I absolutely did not want to believe that what I was looking at was accurate."
President Trump promised a tax cut with the new law. And by most measures, the majority of Americans will see one. The non-partisan Tax Policy Center predicted that the tax law would reduce personal income taxes by an average of about $ 1,260, although this benefits higher incomes.
Some people have already seen the benefit in the form of larger paychecks. This is because the law has forced employers to change what they have withheld. But the system is far from perfect and many workers do not have enough taxes set aside. Now, the IRS wants this money.
In addition, the law also removed personal exemptions, increased child credits, limited popular deductions and generally upset many known practices that determine what happens at the time of imposition. Taxpayers feel a little moored.
"We were very comfortable with our tax laws. It had existed in principle since 1986. Suddenly, all those things that were very important to people have changed … it's all different, "said Howard Gleckman, principal investigator at the Tax Policy Center.
Kraft and Elias are able to pay their tax bill, but he is still stunned. He even tried to do reverse engineering to determine where they went wrong, plunging page after page into the rules of the IRS. He meticulously gathered all the numbers. The couple finally asked a CPA to check the numbers they saw in TurboTax. Crushly, they were right.
The couple's effective tax rate was lower, but they still owed the government.
"I have the impression of having reached a stage of heartbreak of acceptance," he said. "In a twisted way, I would have had to pay that all year and now I have to pay it in a lump sum.
A number of experts, such as Gleckman, urge taxpayers to be less concerned about their repayment or what they owe when they measure the effect of the new tax law. These are just a few examples of your tax situation.
But the truth is that many Americans have come to rely on refunds. About three-quarters of US taxpayers receive one and their average salary is about $ 2,800. For some low-income households, this is the biggest cash injection of the year.
The IRS announced Thursday that the average refund of the tax as of the second week of the filing season was $ 1,949, down 8.7% from the previous year. The total number of refunds is down by 16%.
Experts warn that it is too early to draw any conclusions about a tax season that ends in April. In addition, the number of returns – 27 million as of February 8 – is down 10% from last year, partly due to the partial closure of the government. The picture will become much clearer as more and more deposits are processed, refunds will be made and the IRS will be reinstated at full speed.
Nevertheless, the first results surprised the first registrants and worried those who have not yet addressed their tax issues.
Part of the problem is how employees and employers adjusted (or not) payroll deductions to reflect changes to the law. The government has issued updated payroll deduction guidelines to help employers determine the amount to be set aside in an employee's paycheque to cover taxes. Hold back too much and you get a refund at the time of the tax; too little and you have to.
It's at best an estimate. But it is an estimate that has become much more difficult to do with the new law.
According to a report released last summer, the Government Accountability Office estimated that about 30 million workers had not withheld their paychecks too much, which allowed them to increase their take-home pay. , while increasing their tax liability. That's about 3 million more workers than normal.
It appears that few taxpayers took into account the IRS's advice to conduct a "paycheque check" to ensure they had withheld the appropriate amount. The Payroll Processing Manager, ADP, which is responsible for paying one in six Americans, said the vast majority of users in its system had not updated their payroll deductions last year.
Some taxpayers who made adjustments found that they could not understand everything.
Kevin McCreanor, of Milton, Georgia, and his wife normally receive a large refund each year – they rose to more than $ 12,000 last year. If they know that waiting for a large refund is not the best financial strategy, they like repayments and put everything they bring back into their daughters' education. Their earnings, derived mainly from his wife's work in telecommunications, can vary considerably. It was comforting to never face a big bill.
The couple increased deductions on their pay check to ensure the same, but found that he was only getting $ 519 this year. Their incomes and tax rates have increased, and McCreanor acknowledges that he probably could have done more to prepare himself, but he is still very disappointed.
Some surprises, however, were welcome. Brian Goodell and his wife usually have to pay between $ 10,000 and $ 15,000 a year. But this year, the couple Tigard, Oregon, gets a refund of $ 15,000. They believe they have taken advantage of the increase in child tax credit. They also made more charitable donations and increased their deductions. Although Goodell does not really know why it worked so well, he will gladly accept the refund.
Taxpayers can get a better idea of how they came out by looking at their tax liability or their effective tax rate. This information is often available on the summary received from an accountant or tax preparation software. They can also consult the "total tax" on these summaries or Form 1040. They are not perfect measures either, but they offer some perspective.
And remember that getting a refund is not necessarily a good thing. The breakeven is really the best result from an economic point of view. If you get a refund, it means the government has kept your money when you could have used it.
In addition, consider that taxes are rarely an equal comparison from year to year, said Eric Bronnenkant, Tax Manager at Betterment and CPA and Certified Financial Planner. People's lives change in ways that significantly influence their taxes, such as marriages, divorces, children, moving or job changes. The average taxpayer may not fully realize the impact of some of these changes.
"I'm not surprised by people's reaction," said Bronnekant. "I think for some people, the reaction is more justified than others."
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