March 4, 2019
Thanks to adjustments in federal withholding tables in February 2018, my partners and I have had a number of conversations with clients about the results of these changes.
The conversations were less than fun.
Clients were taken aback when they learned their refund checks would be lower than anticipated because of the withholding adjustments.
A recent Newsweek article indicated the average refund was down by 8.7 percent – from $2,135 to $1,949. And, as of mid-February, there had been a 16 percent decline in the number of refunds.
This is pretty close to what we have seen at Spectrum.
Just a little background: the changes were part of the Tax Cuts & Job Act of late 2017. In most cases, people had more take-home pay for most of 2018 because of the adjusted tables. As a result, they paid in less. This could result in a lower refund or no refund at all. In some cases, money was owed to the IRS.
After reviewing the Act early on, we thought the withholding tables had been over-adjusted.
It seems the Internal Revenue Service agreed.
The IRS introduced an online calculator last summer so that taxpayers could check into the specifics of how much was being withheld from their paychecks. The use of this calculator is free and seems to work if you take a little time to correctly input your family income.
However, if this online procedure makes you uncomfortable, please don’t hesitate to talk with an accountant or tax preparer. Both are familiar with how withholding tables work and can explain the basics to you.
Since my Spectrum partners and I saw the writing on the wall early on, we mailed letters to our clients, suggesting we compile a tax estimate. This information would indicate whether they should make a withholding adjustment.
Many clients took our advice but others didn’t.
To the credit of the IRS, its employees pushed hard last summer to encourage everyone to recalculate withholding taxes. But we are not sure this push was publicized as much as it should have been.
If the IRS had recognized the problem, it might have been a good idea to change the tables again. That being said, many people might have viewed such a change as a tax increase.
As a side note: Changes in federal law have created a large spread between a person’s federal taxable income and the state of Kansas taxable income. Many taxpayers claim the same exemptions for both federal and state taxes.
Therefore, we are seeing more people owing a larger amount to Kansas for 2018. Most taxpayers cannot itemize for federal taxes because of the expanded standard deduction. However, the Kansas standard deduction has not been adjusted.
The result? Many people are getting less of a refund or even owing both federal and Kansas taxes for 2018.
All employees should keep in mind that they can adjust their federal and Kansas withholding at any time during the year. It is a good idea to monitor both to avoid unpleasant surprises.