By Capt. Thomas Sandbrink | Fort Knox Tax CenterFebruary 28, 2019
One of the most common questions the Tax Center receives from taxpayers is why their refund is lower this year compared to last year.
This is a complicated issue, and numerous factors affect how much a taxpayer receives at filing time. Changing withholdings is one of the most common factors.
The IRS uses a "pay as you go" system to collect income tax. This means taxpayers are expected to pay taxes to be paid on income as it is earned. The most common way this is done is through employer withholdings.
When starting a new job, employees fill out a W-4 form claiming a number of exemptions. Employers use this form to estimate tax that will be owed and withhold that amount from the employee's paycheck. If the employee claims more exemptions on the W-4, less tax will be taken out throughout the year. Taking more exemptions in comparison to previous years is one of the most common reasons why taxpayers see a lower refund. At the time of filing, it can be easy to forget these exemptions were taken throughout the year. It is a smart practice to periodically review your W-4 and make sure the number of exemptions is still correct. Doing so will help protect against surprises at the time of filing.
Another common reason taxpayers receive lower refunds is because they had more income compared to previous years.
As service members move to a new location, their spouses often switch jobs, resulting in variances in income from year to year. Other possible sources of additional income include raises, bonuses and forgiveness of debt. Passive income, such as rental properties, interest and investments, can also add up. From year to year it can be easy to forget how much you made compared to the past, but keeping track of earnings is a good way to keep track of roughly how much tax will be owed.
Further reasons for lower refunds can include phasing out of certain credits.
For example, once children reach 19 years old, or 24 if full-time students, they can no longer be claimed as dependents for the child tax credit. Likewise, students who graduate from college no longer qualify for tuition credits. As taxpayers' incomes rise, they also are disqualified from the earned income credit. Credits such as these account for major tax savings and no longer being able to claim them will have significant tax implications.
Finally, several important changes to the tax code went into effect this year which are affecting tax refunds.
Kentucky passed an amendment reducing the amount of retirement pay that can be excluded from income from $41,110 to $31,110. This means that military retirees will owe taxes on any retirement benefits (i.e. pensions, annuities, etc.) they receive over $31,110. Many retirees who visit the Fort Knox Tax Center did not previously owe state taxes on their pensions, but now they do because of this change.
The other major change in the tax code was the Tax Cuts and Jobs Act, passed by Congress Dec. 22, 2017. This bill eliminated personal exemptions and certain itemized deductions, doubled the standard deduction, and adjusted tax brackets.
Additionally, following its passage, the IRS adjusted the formula employers use to calculate withholdings. In an effort to reduce the need to pay large refunds, the IRS took out less withholdings throughout the year. Therefore, although the taxpayer may not have seen as large a refund, the net taxes paid remained the same.
There are many factors that affect how much taxes each taxpayer owes, but these are some of the most common.
If you think your refund is lower than it should be, carefully consider if any of the factors discussed above apply to your situation. If you have further questions, the Fort Knox Tax Center is currently open for appointments. Be sure to have all tax documents, photo identification and social security cards for everyone listed on the return, including spouse and dependents. Furthermore, both spouses on married filing joint returns must be present for the entirety of the appointment.
To make an appointment, call (502) 624-0044.