Smaller tax refunds surprise those expecting more relief

The tax preparers at H&R Block had a new class before their busy season started this year: empathy training.

They listened to a mock exchange between an employee and a customer whose refund would not just shrink but disappear. The fictitious client had received a $1,500 refund last year but this year would owe $575.

The playacting was prescient. The tax overhaul that took effect last year promised relief, but now that returns are being filed, some people are baffled. They're getting smaller refunds — or sometimes having to write a check — even though nothing in their situation seems to have changed.

The average refund among early filers was down 8.4 percent, according to the IRS. The smaller checks, in some cases, stem from the loss of certain deductions. For others, it's because less money was being withheld from their paychecks. The IRS, in trying to more closely match the amount held out of paychecks with the amount that taxpayers will owe, changed its withholding tables.

The result is that taxpayers may be paying less overall but still getting a bill after filing their return. That has caught many people off guard.

Ashley Alt, who works in information technology in Illinois, said she was floored when her tax program spit out her $4,800 bill. "I was expecting to get less of a refund or maybe owe a little bit," she said. "I did not expect to owe two months of take-home pay."

The overhaul has been President Donald Trump's signature accomplishment. It lowered tax rates for businesses and individuals, and provided a break to self-employed people and those with pass-through businesses.

But it also eliminated or cut back some popular deductions, most notably capping the deduction for state and local taxes at $10,000 — a provision that drew significant criticism from residents of high-tax states. Although most people will see their tax burden decline, the Government Accountability Office expected about 4 million people to pay more.

Taxpayer frustration has taken on a political dimension. Some Democrats, including Sen. Kamala Harris of California, a presidential candidate, seized on the issue to hound Trump, calling the overhaul a tax hike on the middle class to "line the pockets of already wealthy corporations." Online outrage has led to a #GOPTaxScam hashtag on Twitter just as taxpayers, trying to navigate the new rules, have encountered roadblocks because of the monthlong government shutdown.

On Monday, the Treasury Department pushed back against reports of smaller refunds, saying it was still early in the filing season. "Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data," the department wrote on Twitter.

And tax experts said some people who would receive larger refunds — those claiming the earned-income tax credit — aren't getting their checks yet.

The confusion over the new rules underscores the harried nature of this year's tax season. The IRS is getting back up to speed after the shutdown, which began just as its workers were preparing for the arrival of returns. And some accountants are still going through training to understand all the changes, even as they're crunching numbers for clients.

Many tax professionals said they had tried to prepare their clients as best as they could by having them adjust the amount they had withheld from their checks.

Alt, 36, said she and her wife had not adjusted their withholdings and believed that was the reason for the reversal from last year's refund. The bill is big enough that she hasn't filed her return yet.

"I need to figure out a way to get all the money together," she said.

Since the overhaul took effect, tax professionals have expected residents of places with high state and local taxes to be hit hard by the cap on those deductions. But the legislation did away with a number of other deductions that have created surprises for many.

Nancy Bay, a 65-year-old bookkeeper from Garrett, Ind., was disheartened to learn how the new rules would affect her and her husband, a truck driver who is on the road roughly five days a week. While they usually receive a refund of about $1,500, they will have to pay about $400 this year.

They also blamed the withholding issue and losing the ability to deduct his business expenses, which are not reimbursed by the trucking company he works for. Even the larger standard deduction did not make up for it, Bay said.

"He cannot come home to eat each night to save money," she said. "He has to pay for showers. He has a cellphone that he used for business — we used to be able to deduct part of that."

The speed from bill to law and from law to how it works in practice has made for a steep learning curve.

Matthew Horowitz, a certified public accountant in Columbia, Md., was taking continuing education courses to learn more about a new tax rule that allows some business owners and self-employed people to deduct 20 percent of their "qualified business income."

"I would never take continuing ed during tax season," he said. "But we're all going for three hours on Friday — it's on nothing but the Section 199A deduction."

Janet Lee Krochman, an accountant from Costa Mesa, Calif., said she was also still learning about how the rule worked.

"We weren't expecting to get 180 pages of regulations on the 18th of January, 10 days to the opening of filing season," she said.

There have been other complexities. Tax filers in places that require their state and federal returns to mirror each other — for example, if they take the standard deduction on their federal return, they must do the same on their state return — may end up owing more to their states than in the past. The reason: Standard deductions in states like Kansas, Virginia and Maryland are on the lower end. (Lawmakers in states including Virginia and Maryland have voted to raise their standard deductions to help compensate.)

As a result, tax pros in these states are suggesting running multiple sets of calculations. It may be worth sacrificing the larger federal standard deduction to itemize on the state level and get a bigger return there.

"If you are single with significant state income or real estate taxes, by choosing to deduct the lower amount of itemized deductions on your federal return you may reduce your overall federal and state tax due to the increased deduction on your Kansas return," said Julie Welch, an accountant in Leawood, Kan. "It pays to run the calculation."

Despite the confusion, some accountants have had the pleasure of delivering good news.

Conor Barnes, an accountant at Egan Tax & Books in New York, prepares returns for many renters who typically don't have enough individual deductions to itemize their returns. Instead, those filers take the standard deduction, which has doubled.

"Now that the standard deduction is higher than what it has been," Barnes said, "people without mortgage interest and real estate taxes are seeing a tax benefit they haven't seen in prior years."

She also works with a lot of freelance workers, including photographers, who didn't realize they would receive a nice tax benefit from the new qualified business income deduction.

Jackson Hewitt, a tax preparer that caters to moderate-income clients, said it was seeing more filers with lower tax liabilities and higher refunds. Some were taking an immediate advance that would be paid back when their check arrived from the government.

"Our refunds are better right now," said Mark Steber, the company's chief tax officer. "But we have those customers because we have a product where you can get your money that day. We are predispositioned to get those customers."

Even some people who knew they would be on the hook for more come tax time have been unpleasantly surprised.

Robin Baker Williams, 44, and her husband expected a bigger tax bill because she was returning to the workforce, taking a job as a high school history teacher. The Virginia couple got a $2,000 tax refund last year. But this time around, the loss of some deductions and lower withholdings from her husband's checks meant they owe $3,000 on their federal return — a $5,000 swing.

"We were expecting to have to pay something," she said. "But we weren't thinking it was going to be such a huge difference."