If you haven’t done your taxes yet, you may have heard that not everyone is getting as big a tax refund as they expected. Conversely, you may not get a refund at all and wonder why you’ll owe taxes this year, especially if you didn’t in 2018. Nearly one in five Americans who have prepared or filed their federal income taxes this year will have a tax bill, according to a recent tax survey by NerdWallet among 2,031 Americans 18 and older. (Of those surveyed, 1,789 have filed or will file federal income taxes.)
NerdWallet also estimated that 7.9 million taxpayers who received a refund in 2018 will be owing money in 2019. The study also found that almost one-third of Americans who already filed are expecting a smaller refund than they got a year earlier. So, what happened?
“There are so many moving parts to the tax code, and the Tax Cuts and Jobs Act changed so many of the rules,” said Andrea Coombes, tax expert for NerdWallet. Changes include everything from deductions to tax credits. As a result, she said it’s hard to generalize about how the new law may affect any one group of people. It also doesn’t mean that everyone will owe the IRS money; NerdWallet’s study found that approximately one-third of Americans are expecting a bigger refund than they received a year ago. And, overall, the average tax refund is larger than people were expecting to get, said Coombes.
How deductions may impact your taxes
If you haven’t yet done your taxes and are wondering which category you’ll fall into — owing money or receiving it — that’s a good question. Lisa Greene-Lewis, CPA and tax expert at TurboTax, said that the biggest change to the tax law is the way deductions are structured. “The new law nearly doubles the standard deduction and eliminates or limits a number of common itemized deductions many people took in past years,” she said. “TurboTax estimates that nearly 90 percent of taxpayers will take the now higher standard deduction, up from an estimated 70 percent last year.”
For example, those with higher property taxes and property values may see a decrease in their tax deductions and owe more than the previous year, Greene-Lewis said. Also under the new tax law, families may miss the dependent exemption. But, if you’re self-employed, you may be able to receive the new 20 percent qualified business income deduction. Since there are certain variables, such as the type of business you have and how much you earn, this deduction may be more beneficial for some people more so than others. “For instance, a single Uber driver, without kids and earning $26,000, will see about $623 in tax savings on their 2018 taxes due to the 20 percent deduction from QBI, which further lowers their tax liability,” said Greene-Lewis.
How your withholding may impact your taxes
Another factor impacting whether or not you will owe taxes has to do with the fact that five of seven tax rates have been lowered. Because of the elimination and reduction of some deductions, if you didn’t adjust your withholding, you may owe money to the IRS or see a lower refund. “Since the new law reduces tax rates, many people are expecting to see more money in their pocket,” said Greene-Lewis. “However, it’s important to remember that it may have come in the form of bigger paychecks in 2018 instead of a larger tax refund in the spring.” In other words, if you claimed more allowances on your W-4, less income tax was withheld, resulting in bigger paychecks. But, it’s a trade-off; come tax time, your refund amount will be lower.
Mike Slack, lead tax research analyst at The Tax Institute at H&R Block, said he thinks that the biggest reason people may owe taxes this year is if they didn’t update their withholdings. “Failing to update your W-4 puts taxpayers at biggest risk of unplanned outcomes, ranging from drastically higher refunds that could have been helpful during the year to owing the IRS instead of getting an expected refund,” he said. Whether you forgot or didn’t know that you can update your W-4 at any time, it’s a good idea to use the IRS’ Withholding Calculator. (If you already filed your taxes, at least you’ll be prepared for next time.)
How to deal with your tax bill
If you’re among those who will owe taxes, especially if you didn’t expect to, tax experts say not to panic. Slack said the most important thing to do is to file regardless; otherwise, you’ll have to pay penalties and interest, too, which will only make the situation even more costly.
“First, see if you have the cash on hand to pay for it — using your savings is probably the most economical way to go, because you don’t have to worry about paying fees or interest charges,” said Coombes.
If you don’t have the money to pay your tax bill, Coombes suggests an installment plan. “The IRS offers installment plans that are really useful,” she said. “As long as you can pay off your bill within four months, it’s free to apply, though you might be on the hook for interest charges.” Slack said to keep in mind that if you set up an installment agreement, the penalty on your unpaid balance reduces to 0.25% per month, until you pay the full balance on schedule. “Interest is charged at the short-term federal rate, and may change each quarter, plus three percent,” he said.
Slack said another option is to request a short-term extension to pay the full balance. That way, the IRS will provide up to 120 days for you to pay it. “There is no fee to request the extension, but there is a penalty of 0.5% per month on the unpaid balance,” he said, noting that the interest rate is the same as for the installment plan.
A fourth option is to apply for a hardship extension, Slack said. “You’ll qualify only if you can prove that paying the tax you owe would cause financial hardship, based on IRS financial standards,” he said. Although there’s no cost to apply, and no penalties, Slate said that interest for this is also calculated at the short-term federal rate, which may change each quarter, plus three percent.
Coombes said you can also use a zero percent credit card to pay your tax debt. “Generally, we recommend avoiding using a credit card to pay your taxes, because you’ll owe interest on top of a tax payment processing fee of up to two percent,” she said. “But if you qualify for a zero percent card, and you can pay off the balance before that introductory period ends, then you’ll only be on the hook for that tax payment processing fee.”
Yet another way to finance your tax payment is to shop around for a personal loan through a bank or credit union, said Coombes.
Although there are some new tax laws, knowledge is power — the more you understand the new tax laws, the more prepared you’ll be when you do your taxes and see if you’ll receive a refund or owe the IRS.