In recent weeks, the headlines have been full of stories about tax refunds – or, perhaps more accurately, the lack of tax refunds.
It’s the kind of thing that might not normally find its way into the headlines, but this particular situation has struck a chord – both because it includes people who normally count on refunds, and because it comes in the wake of a much-ballyhooed tax cut.
Of course, while there were reductions in rates, there were other changes in the tax structure as well. The kind of changes – not only in rates, but in exemptions – that made it hard to figure out at an individual level whether you would actually see a reduction in taxes or not, certainly when the state impact was factored in.
Regardless, if the headlines are to be believed, for many the outcome has been a surprise – and not a pleasant one.
The reality is that the law changed the rates, and the IRS decided to change the withholding tables to match the new tax structure. Now, whether that worked to your advantage or not is still something of a crapshoot, but, certainly based on the early returns (literally), it sounds as though many, perhaps most, of those early filers are getting back less, in some cases paying more, and in many cases paying when they are accustomed to a refund. And this for individuals who – despite repeated cautions from the IRS (and the press) that change was afoot, and that they’d be well-advised to double-check their withholding levels – didn’t.
The net effect of all this is a kind of weird anti-saving “nudge.” Sure, for many the changes in the withholding table likely put more money in their take-home pay for most of 2018 – albeit, based on my informal survey, in amounts so small (or coincident with other changes in payroll) as to go largely unnoticed. That said, and as many are now finding out, those small per paycheck amounts can add up to something big – or, more precisely, at the end of the year a big reduction in the over-withholding tax refund “bonus” to which they had grown accustomed.
Now, you can argue that it’s irrational to give what amounts to an “interest free” loan to Uncle Sam. That said, and for better or ill, there are clearly many who, deliberately (or in some cases, inadvertently) choose to do just that.
Indeed, once the reality of this tax filing season sets in, some may well head straight to payroll to, once again, “over” withhold.
However, here’s hoping that, many will decide instead to withhold a little “extra” in their 401(k) – and give their retirement a boost – with interest – instead.
Note: For those who want to avoid withholding/refund surprises next year, the IRS has developed a withholding calculator.