Why your tax refund is smaller and what to do about it

Count your Benjamins.
Count your Benjamins.
Image: REUTERS/Mohamed Abd El Ghany
We may earn a commission from links on this page.

Tax refunds for US taxpayers are down $6 billion compared to 2018 according to the latest data from the IRS, the result of changes in the tax code. For many individual taxpayers, that comes as a nasty surprise, as the average refund for early filers is 8.8% smaller than last year, down from $2,035 to $1,865.

Although the Tax Cuts and Jobs Act of 2017—President Trump’s tax law—broadly increased take home pay, it did so through changes to federal withholdings, the money that is automatically deducted from paychecks to cover federal taxes. Thus, instead of getting a meaty refund, employees have subtly experienced the changes with slightly more money in their wages every pay cycle.

“The rub [is] that when people go to file their 2018 tax return, they’re going to be weighing the amount of the tax cut they received through lower withholding last year versus the actual tax cut they’ll be receiving now. And it’s that difference that is the change in the refund,” said Joseph Rosenberg, a federal tax expert at the Tax Policy Center, a non-partisan think tank.

While increasing withholdings to score a larger refund isn’t optimal financial management (it’s like giving the government an interest-free loan), many Americans have come to rely on the April cash injection. Thus, “losing” the refund might hurt more than larger paychecks help. Withholding more in taxes than you owe is akin to being forced to save a bit of money each month, which is easier said than done for most tax payers.

For your 2018 tax return, it’s too late to update your withholding allowances (that money’s already in your pocket).

However, if you want a larger refund from Uncle Sam next April, you can update your W-4, the employee’s withholding allowance certificate. In fact, the IRS encouraged employees to consider this step shortly after the TCJA was passed. On Line 5 of the W-4, you enter the total number of withholding allowances you’re claiming (e.g. if you are filing as head of household or claiming a child tax credit) and on Line 6 you can indicate an additional amount of money that you want withheld from each paycheck.

“Taxpayers who complete new Form W-4s should submit it to their employers as soon as possible,” says the IRS. “With withholding occurring throughout the year, it’s better to take this step sooner, rather than later.”