Every summer, Mike McClure looks at his income tax withholding. The Apple Valley man doesn't want to give the government what he calls a "free loan" by having too much money withheld from his paycheck. He also doesn't want to end up owing a bunch to the IRS when he files his taxes in April.

In the past, McClure's system has led to little more than minor tweaks. This year, under the new federal tax law, he will owe the federal government $6,800 in April if he doesn't radically alter his withholding for the remainder of the 2018 tax year.

"This whole tax-cut thing was sold to middle-class Americans as 'we're all going to get a tax cut,' " McClure said. "This wasn't what I expected."

The most significant rewriting of the U.S. tax code in a generation established lower tax brackets and higher standard deductions, but it also eliminated personal exemptions and limited the amount taxpayers could deduct for real estate taxes and state and local taxes. Minnesotans who have relied heavily on those deductions in the past to reduce their federal taxes could be in for an unpleasant surprise come April.

"Most people take the standard deduction," said University of Minnesota accounting Prof. Paul Gutterman. "But for those who itemize, this could be significant. Many Minnesotans who in the past have gotten refunds may owe."

Tax reform will likely benefit many Minnesotans. Data analyst Nate Tracy and his wife, Emily, "have been fine," Tracy said. "We itemized [tax deductions] last year. This year we'll use the standard deduction because it is worth more. It really should be a breeze to file our taxes."

The most immediate benefit of tax reform — lower tax rates — showed up earlier this year in the form of higher take-home pay for many Minnesotans. But the combination of larger paychecks and smaller deductions could leave some households that usually get a refund owing hundreds — even thousands — of dollars on April 15, 2019, tax consultants said.

"People aren't understanding the gravity of the deductions," said Laura Nickolay, a senior tax associate at White Oaks Wealth Advisors, Inc. in Minneapolis. When they do, she continued, "they are going to be frustrated because they are not going to get more [government services], but they have to pay more in taxes."

Nickolay offered two examples. One of her very wealthy clients was able to deduct $305,000 in state, local and real estate tax payments from his and his wife's 2017 federal taxes, but they will be able to write off only $10,000 in 2018. Under tax reform, Nickolay said, the couple have eligible itemized deductions of just $21,000, less than the newly increased $24,000 standardized deduction that they will now have to use.

In a second example, a single, upper-middle-class client of Nickolay's lost $15,800 of her $25,800 in itemized state and local tax deductions to the new limits. The lost deductions will add $3,000 to $3,500 to the client's 2018 federal tax bill, Nickolay said. As a result, the client has had to significantly lower her take-home pay for the rest of the year.

Historically, roughly three-quarters of Americans get tax refunds, said James McTigue, author of an analysis of the new tax law for the U.S. Government Accountability Office. McTigue said that while almost all individuals will see a 3 percent cut in their tax rates under the new tax law, new withholding rules do not presume an April refund and are aimed instead at having taxpayers break even on what they have paid in taxes and what they owe at year's end. All taxpayers should check withholding numbers from a recent pay stub with the IRS' online withholding calculator to see what their estimated tax bill will be, McTigue recommended.

Matt Eckholm upped his withholding as soon as he saw an increase in his paycheck.

"It became clear that this was a trick to score points with a political base," said Eckholm, a 26-year-old videographer living in St. Louis Park. "I didn't want to deal with that in April. People who assume they are getting a refund may be in for a rude awakening."

Nickolay says people are confused. "They think because their paychecks are bigger their tax refund is going to be bigger," she said.

Accountant Ann Etter estimates that roughly half the clients she sees at Goodney & Associates in Northfield have not had enough taxes withheld to avoid a bill in April. Some other accountants interviewed by the Star Tribune reported similar experiences.

Two elements of tax reform contribute significantly to what tax specialists call "underwithholding." First, individuals with jobs that require large personal investments in equipment, such as tools or a car, lost thousands of dollars in deductions when the new tax law eliminated employee business expenses from the tax code.

More problematic, according to Etter, is the elimination of personal exemptions for taxpayers with older children. A $4,000 personal exemption translates to a $1,000 in tax savings for taxpayers in a 25 percent tax bracket and roughly $600 for taxpayers in a 15 percent bracket, Etter explained. Under the new tax law, children 17 and older qualify only for a $500 tax credit per child. Families with children under 17 get a $2,000 tax credit per child.

Financial advisers encourage clients to take as many pretax deductions as their employers allow for such things as retirement plans and health savings accounts before upping their withholding. In the end, Etter said, that may not be enough to stave off a fundamental question:

"How do you say you got a tax cut when you owe in April?"

Jim Spencer • 202-662-7432