Many Americans who filed their tax returns early in this year’s tax season discovered rather than receiving their usual refunds, they actually owe money to the IRS — and some who voted for President Donald Trump are now regretting their decision.
According to Vox, the issue is two-fold: the 2017 Tax Cuts and Jobs Act changed the method of withholding, leading to more employers underwithholding rather than overwithholding; and the law also “eliminated or curbed a whole bunch of popular tax deductions.”
Savvy taxpayers who closely followed the news last year might have heard about the potential effect these changes would have on their tax returns, but as Vox noted:
This was all explained in a Government Accountability Office report last summer, but it turns out that many people are not regular readers of GAO reports and did not take the GAO’s official advice to check their withholding status. The result? Surprise tax bills!
How does withholding work?
In practice, however, the government has employers calculate how much tax their workers are likely to owe at the end of the year. Then each pay period, companies simply forward an appropriate amount of money directly to the IRS and pay you what’s left over. When you file your taxes at the beginning of the year, you compare the amount of taxes you owe to the amount of taxes you’ve already paid and get either a refund or a request to send more money. And historically, by design, most people — around 75 percent — get a refund.
That’s because it’s a lot easier for the government to pay out refunds to people who overwithheld than to run around trying to collect cash from people who underwithheld.
And how did the new tax law change withholding?
The change is that fewer taxpayers should be overwithholding and more should be under withholding — in other words, fewer people will get a refund and more people will be asked to pay up.
Treasury’s viewpoint is that this is change for the better. Under the old system, 75 percent of taxpayers were getting refunds — meaning that the withholding system was poorly targeted on average. By switching to a new system in which fewer people get refunds and more people owe extra money, they will be achieving a more balanced result.