Most Mainers have enjoyed lower federal income tax withholding from their paychecks since the Republican tax cuts took effect in 2018, but tax analysts said they should be prepared for an unpleasant surprise.
In many cases payroll departments have withheld too little tax, requiring workers to make up the shortfall by paying an end-of-year tax bill. Others who rely on big tax refunds for savings or to fund family vacations will find that they are receiving only a fraction of what they are accustomed to this year.
The 2018 tax forms are also more complicated and less user-friendly for taxpayers to report information such as capital gains or losses, which is expected to cause a greater number of erroneous filings.
Tax accountant Pete Dufour said many people have been surprised to learn that while their overall tax liability did decrease in 2018, the tax withholding from their paychecks was reduced by an even greater amount.
“So if people were expecting refunds similar to the previous year, in a lot of cases the refunds were smaller, or in some cases they owed taxes instead of getting a refund,” said Dufour, owner of Dufour Tax Group in Portland and a member of the Maine Society of CPAs.
With the April 15 deadline for filing 2018 tax returns just days away, most taxpayers are expected to realize a net decrease in their federal income tax liability and thus greater savings as a result of new rules included in the Tax Cuts and Jobs Act of 2017.
The tax cut, championed by Republican leaders, was criticized by their Democratic counterparts for giving larger cuts to businesses and the wealthy while providing only moderate cuts to the middle class. Democrats also took issue with the corporate tax cuts being permanent while the cuts for individuals and families are set to expire at the end of 2025.
Another issue for Democrats is the fact that the reduction in federal revenue from the tax cuts was not offset by other revenue increases or spending cuts. The federal deficit ballooned by about $779 billion during the 2018 fiscal year that ended Sept. 30, and the federal government is expected to borrow an additional $1 trillion in the coming fiscal year, largely to offset revenue losses from the tax cuts.
Still, the tax cuts have offered at least some financial relief to most taxpayers. However, many are finding out when they file their tax returns that the savings aren’t as big as they had expected.
The discrepancy stems from new tax-withholding guidance from the Internal Revenue Service that was issued to payroll departments in early 2018.
In the past, payroll managers depended largely on the number of personal exemptions claimed by an employee to determine family size, which helped them calculate how much federal income tax to withhold throughout the year. But under the new rules, personal exemptions were eliminated entirely, making it more difficult for payroll departments to determine accurate tax withholding for each worker.
“The new rules didn’t take into account family size in the same way that they did before,” said Sarah Austin, policy analyst at liberal think tank the Maine Center for Economic Policy.
The result was that a large number of workers were paying less than 100 percent of their actual federal income tax liability throughout the year, she said, which made the tax cut look bigger than it really was. Some critics have claimed that this was by design, but Austin said there is no hard evidence to support that allegation.
Regardless of the motivation, the outcome has been a decrease in tax refunds and an increase in the number of people who owe federal taxes, she said.
“Because they were paying less over the year than they should have been, they’re getting smaller refunds or they’re actually having to pay tax liabilities when that wasn’t the case before,” Austin said.
According to Internal Revenue Service data on federal income tax returns filed nationwide as of March 22, the number of taxpayers receiving refunds decreased by about 2.6 percent from a year earlier, while the aggregate amount of tax refunds was down by nearly $6 billion, roughly 3 percent. However, about 2 percent fewer tax returns had been filed than by March 22 of 2018.
According to the IRS, the average tax refund amount was down by only about $10. Still, Austin said the average doesn’t indicate whether certain groups came out better or worse than others. She cited a recent U.S. Government Accountability Office report that found single-income married couples with children were the most likely group to have their income taxes incorrectly withheld in 2018.
Both Dufour and Austin noted that taxpayers can ask their payroll managers to increase their federal income tax withholding for the current year to ensure they don’t experience a repeat deficit on their next tax return.
In the meantime, some businesses are stepping up to help out taxpayers who find themselves in a financial pinch as a result of inaccurate withholding. For example, Scarborough-based Town & Country Federal Credit Union recently created a special tax-relief loan to help consumers cover refund shortfalls or tax payments.
“We have had about half a dozen or so members apply and be approved for a loan,” Town & Country Vice President Jon Paradise said, adding that the credit union anticipates more applications on the way. “The average loan amount has been about $3,700.”
J. Craig Anderson can be contacted at 791-6390 or at:
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