Surprised by a Balance Due or Decreased Refund? Here’s What You Should Know

This year was the first-time taxpayers filed returns under the new tax law.  There was a lot of information (and misinformation) in the news leading up to the official opening of the 2019 filing season and the frequency of news stories has continued.  We’ve had many clients receive a bit of a shock when given the results of their 2018 return.  Many were pleasantly surprised by a larger than normal refund or, for some, their first refund in a long time.  For others, however, the new tax law resulted in a smaller than normal refund, a balance due for the first time, or a larger than normal (or larger than expected) balance due. I want to help shed some light on the possible causes of these surprising results and help explain the steps you can take for a preferable outcome next year.

First, a quick overview of the changes affecting the largest percentage of taxpayers (i.e. changes to the standard deduction, reduction in withholdings, and loss of the personal exemptions).

  1. Standard deductions were increased significantly from $6,350 to $12,000 (single), $12,700 to $24,000 (married filing jointly), and $12,200 to $18,350 (head of household). On your tax return, you can take a standard deduction or the sum of your itemized deduction – whichever is higher.
  2. A new withholdings table was introduced under the tax law resulting in the automatic reduction of withholdings. This is the “more money in your paycheck” part of the new law. This means that the amount of money being withheld for tax purposes from paychecks and retirement distributions generally dropped unless you requested a change to your withholdings.
  3. Personal exemptions are gone ($4,050 per person). There are no exceptions!
  4. Changes to tax brackets resulted in an overall decrease in the tax liability for many tax payers.

*There are MANY other changes, but these are the specific items that had the greatest effect on many of our clients.

In previous years, the standard deduction or the amount of itemized deductions (whichever is greater) was added to total personal exemptions and dependent exemptions.  This amount was used to reduce a taxpayer’s adjusted gross income and arrive at taxable income.  This is the amount used to calculate tax due and is income tax calculation in its simplest of terms!  Income limits exist and there are many more moving parts in tax calculation.  However, for further explanation of the effects of the new tax law, this is really the key concept you need to keep in mind.

Group #1: A surprise refund!

If your return is the same as last year and you made no changes to withholdings and yet you find yourself with a larger than normal or first-time refund, this is probably the result of the increased standard deduction.  If you are a single filer and have not itemized deductions on your return in previous years, then you were most likely taking the standard deduction of $6,350 (in 2017) plus the personal exemption of $4,050 (2017).  This gives you a combined income reduction of $10,400.  Even though the tax law has taken away the personal exemptions, the increase in standard deduction gives the same individual an income reduction of $12,000.  That’s a $1,600 increase.

Here’s an example: in 2017 a single filer who receives a W-2, has no children, and does not itemize has $6500 withheld for federal tax from his paycheck during the year.  At the end of the year, the tax due is $5,100 so this individual will get a refund of $1,400 ($6500 – $5100).  In 2018, this same individual, with no changes to his filing status, has $5,900 withheld from his paycheck (a result of the withholding changes) and ends up with a balance due of $4,100.  This gives him a refund of $1,800 for the year.  Not only does he get $400 more from the refund, but he also kept an additional $600 throughout the year as a result of the decreased withholdings ($6500 – $5900).

20172018
Standard Deductions$6,350$12,000
Withholdings$6,500$5,900
Total Tax Liability$5,100$4,100
Refund$1,400$1,800

Group #2: Taxpayers with a smaller than normal refund 

This is still a group most people are okay with because it means they didn’t have to write a check on April 15, however we have many clients who had grown accustomed to a sizeable refund and were surprised by a decrease on their 2018 return.  For some, the drop has been only a few hundred dollars, but others have received refunds for many thousands less.  Most commonly with our clients we saw this as a result of the loss of unreimbursed business expenses deduction or write-off.  In the past, taxpayers who have received a W-2, but incurred personal expenses in order to do their job (i.e. mileage, car expenses, home office expenses, travel, client meals, office supplies, etc) could write-off many of those expenses against their W-2 income.  For many, these write-offs could be substantial – tens of thousands of dollars in some cases.  These high write-offs could give a W-2 employee with appropriate withhholdings a refund of, for example, $8,000 because of the significant reduction of taxable income created by the unreimbursed business expenses.  With those write-offs gone, an $8,000 refund could be closer to $1,500 this year.

Here’s an example: a sales rep with a total income of $100,000 in 2017 itemized her deductions at an amount of $55,000.  This included $50,000 in unreimbursed business, home office, and vehicle expenses.  This individual ended up with a taxable income of $45,000 and a tax bill of $12,750.  Her withholdings were based on a $100,000 income so total tax withheld from her paycheck during 2017 was $20,000.  This resulted in a refund of $7,250 ($20,000 – $12,750).   In 2018, however, this person goes from taking an itemized deduction of $55,000 (remember – $50k in unreimbursed business expenses) to taking the standard deduction of $12,000.  That is a $43,000 drop in deductions!  Her withholdings automatically decreased by about $2,500 (more money in her pocket throughout the year) and her refund dropped to $1,350.  That’s a total of $3,850 back ($2,500 + $1,350), but it’s a far cry from the $7,250 refund she had gotten the year before.

20172018
Income$100,000$100,000
Deductions$55,000$12,000
Withholdings$20,000$17,500
Total Tax Liability$12,750$16,150
Refund$7,250$1,350

Group #3: First time balance due or a larger than normal balance due

Unfortunately, we encountered many people belonging to this group during tax season. Tax payers typically found themselves in Group #3 for 2 reasons:  an increase in income (from W-2 or 1099s, retirement accounts, stock sales, etc) and a decrease in withholdings.  Many of our clients who found themselves in Group #3 on Tax Day typically had a balance due with their filing in previous years.  For most, they were actually paying less total tax for the year even in instances where they had a slight increase in income.  It was the decrease in withholdings and, occasionally, the loss of exemptions that really get them in trouble.

Here’s an example: a married couple with one dependent took the personal exemption deduction of $12,150 (4,050 x 3) in 2017 alongside an itemized deduction of $16,500. That’s a total deduction of $28,650.  That same couple in 2018 took the standard deduction of $24,000 resulting in a $4,650 drop in deductions without changing anything about their household or deductions.  Both individuals receive W-2s and had a combined income of $155,000 and a total tax liability of $24,500.  Their withholdings totaled $20,000 and their tax bill on April 15th was $4,500 ($24,500 – $20,000).  In 2018, their income increased to $163,000, but their withholdings dropped to $15,000 ($8,000 more in income, but $5,000 less in taxes withheld).  Their total tax liability dropped down to $21,000.  If their withholdings had stayed at $20,000, even with the $8,000 increase in income, their tax bill would have only been $1,000.  Unfortunately, the automatic drop in withholdings gave them a $6,000 tax bill ($21,000 – $15,000).

20172018
Income$155,000$163,000
Deductions$28,650$24,000
Withholdings$20,000$15,000
Total Tax Liability$24,500$21,000
Balance Due $4,500$6,000

 

Key points to remember:

  • The increase in standard deduction resulted in a sizeable increase in deductions for tax payers who did not itemize in the past.
  • The loss of personal exemptions is less than added benefit of the standard deduction in single or married filing jointly households that do not have dependents. However, households with multiple depends or households that typically itemized a significant amount of deductions on their return likely saw a negative effect from this change.
  • Unreimbursed business expenses (which includes mileage and home office expenses) are no longer deductible if you receive a W-2. There are no exceptions.
  • Changes to the tax brackets resulted in an overall decrease in tax due for most taxpayers. Even if you had a balance due this year (for the first time or a balance that was larger than normal), you likely paid less tax total for the year.

Quick tips for 2019:

  • Don’t find yourself with a surprise tax bill this time next year. Do a withholding check-up and increase your withholdings where necessary.  If you are a contractor or are self-employed, talk to your tax professional about making estimated payments.  Remember that the IRS adds a penalty if you owe more than $1,000 at tax time even if you are a W-2 employee with withholdings (see our previous blog post on estimated payments for an explanation of our “pay as you earn” system).
  • If you received a sizeable refund, consider updating your withholdings to allow yourself to keep more money throughout the year. A refund is better than a balance due but getting thousands of dollars back in April isn’t always for the best.  After all, the US government is the only bank that will hold your money all year and not pay you any interest!
  • Review which expenses are still deductible under the new tax law and keep good records throughout the year so you can make the most of your deductions.
  • If you are a W-2 employee who typically has significant unreimbursed business expenses, consider talking to your employer about becoming a statutory employee. This will allow you to retain the benefits of your W-2 while also bringing back many write-offs you have lost under the new law.  Only a few categories of workers qualify for statutory employee status.  Learn more about this option on the IRS website
  • Take advantage of retirement benefits offered by your employer or explore options on your own to reduce your taxable income while also saving for the future (401ks, IRAs, HSAs, etc).

 

Local Business Spotlight: Henrickson Law Group

We are very excited to be featuring our friends Suzanne Henrickson and Kelly Moore of Henrickson Law Group this month!  Suzanne is an experienced attorney specializing in Family Law, Divorce, Custody, as well as Wills and Estate Planning.  After almost 20 years practicing law in Georgia, Suzanne set out on her own to build a practice serving Cobb and Paulding.

Attorney Suzanne Henrickson

Q: What is the name of your business and when did you get started?

Henrickson Law Group, LLC is the name of the business and I have been practicing law for 20 years, 17 of which have been in Georgia.  My entire career has been litigation focused.  For the first ten years, I was a prosecutor for the U.S. Department of Justice, Immigration and Naturalization Services and then a staff attorney for the Honorable Jerry W. Baxter (now retired) of the Fulton County Superior Court bench, managing his civil litigation docket.  Working for Judge Baxter was a fantastic experience.  I learned the Georgia Civil Practice Act (essentially the civil litigation Bible for the state of Georgia) while being exposed to a wide range of civil and criminal proceedings, including a products liability action filed on behalf of a paraplegic child against Ford Motor Company due to a defect in Ford’s rear seat safety latch and a death penalty murder trial.  For the last 10 years, I have focused on family law matters including uncontested divorces, contested divorces, legitimation/paternity actions, step-parent and relative adoptions, name changes, contempt actions, and modification cases.  I also enjoy consulting with clients in need of estate planning documents, including their Last Will & Testament, Healthcare Power of Attorney with or without an Advance Directive, Financial Power of Attorney, and sometimes the modification of their real property deeds to further their estate planning needs. I also assist clients to probate the estate of a departed loved one.  Occasionally, I will represent clients in their civil litigation matters, but prefer the personal involvement and strategy required in their family and estate law matters.

Q: Tell us about your business.  What products and/or services do you offer?

Henrickson Law Group, LLC is a specialty law firm dedicated to helping those in need of any litigation or non-litigation service related to family law or estate law (not elder law).  These are two, specific areas of the law that dove-tail.  They are also areas of the law that are unique and handled very differently than any other civil litigation.  Under the canopy of family law falls divorce, pre and post-nuptial agreements, legitimation and paternity, modification and contempt actions, adoptions, name-changes, and grandparent/relative custody and visitation actions.  Under the canopy of estate law falls the drafting of estate planning documents and the probate of a loved one’s estate whether they have a Will or not.  The first step when confronted with one of these issues is to call us to determine whether we can help, and if not, what to do next.

Paulding County Office

Q: How did you get the idea or concept for the business? 

Interestingly, the business brought itself to me.  During my career, I have worked as a federal and Georgia state employee, for corporate offices, and a large and then medium-sized law firm.  While working as a litigation associate at the last of the law firms I worked for, I started getting business referred to me.  One satisfied client at a time, I created a book of business.  It then became apparent to me that I could work for myself and provide a better quality of experience for my clients and myself if I started my own firm.  That was 10 years ago and I haven’t looked back.  There is something very satisfying about being able to conduct business one’s own way.

Q: Why did you choose your industry/business? 

Honestly, I chose to go to law school because my older brother went to law school.  Good ol’ sibling competition.

Q: What was your mission at the outset? 

When I graduated from law school, I was determined to be an immigration law attorney because immigration law covered all three main categories of law:  business, family and criminal.   Fast forward a few years, have an intervening marriage proposal, relocation from Miami, where I was an INS attorney, to Atlanta, and a marriage (then divorce) and the career path changed due to employment opportunities in Atlanta to that which it is today.

Legal Assistant Kelly Moore

Q: Which channel(s) do you feel has been the most beneficial to the growth of your business (Social media, web-presence, word-of-mouth, networking, etc)?  Why?

By far, the method by which my business has grown has been word-of-mouth, predominately resulting from former clients whom have been serviced professionally and with compassion, colleagues who know that I perform quality representation and courthouse staff in front of whom I have tried a multitude of cases.

Q: What do you feel has been the biggest contributor to the success of your business? 

Having a work ethic and taking the time to talk to people.

Q: Can you tell us about a client experience that made you think, “This is why I do what I do!”?

A recent experience that comes to mine pertains to a 10-year-old girl who has lived with her grandmother since she was about 6 months old.  The mother of this child is, unfortunately, a drug addict, and the father, who has been absent in the child’s life has sought to remove the child from her grandmother’s loving home so that he can receive social benefits.  I have been hired by the grandmother to represent her in the adoption of her granddaughter so that this child cannot be used as a financial pawn by her biological parents in the future.

Q: Do you have a favorite quote, book, or blog that has inspired you as you have grown your business? 

When I am in need of inspiration or encouragement, I turn to Farnoosh Torabi’s podcast “So Money” and select an interview she conducts with an entrepreneur.  It’s fascinating to hear how so many success stories derive from perceived failures earlier in one’s career or from putting into action ideas of how to make something that exists, better.

Marietta Office

Q: What was the most valuable lesson you learned in your first year (or first few years) of business?

Oftentimes, the person who undervalues your services does not make the best client or source of future business.

Q: What has been the biggest obstacle you have faced while starting and growing your business? 

Sadly, the lack of support by some colleagues due to a perceived negative impact on their business.  Fortunately, the ill intentions of some have been greatly outweighed by other colleagues who have been a wonderful support.

Q: What words of wisdom or advice would you offer to someone starting their own business? 

Set client expectations appropriately and then meet them.  If you fulfill your promises and perform the task for which you’ve been hired, your good work will be rewarded with client referrals.  There are fantastic perks to being one’s boss provided you don’t forget that the client is the one that provides you that opportunity.

 

Marietta Office
600 Kennesaw Ave. NW
Suite 500
Marietta, GA 30060
678-640-4586
Acworth Office
2487 Cedarcrest Rd
Suite 221
Acworth, GA 30101
678-640-4586

Major Tax Reform Changes Affecting Homeowners

Are you a homeowner?  Here are some big changes under the new tax law that may have affected itemized deductions on your 2018 return (and one big item that was left unchanged!):

Mortgage Interest Tax Deductions

In prior years, homeowners could deduct interest on loan amounts up to $1 million.  Depending on the interest rate, the deductible amount could easily top $30,000+ in a given year.  Under the new tax law, that limit has been decreased to $750,000 which can result in a substantial decrease in the amount of interest a taxpayer can deduct.   The change in the mortgage interest tax deduction cap only applies to new home buyers.  If you purchased your home prior to December 15, 2017, you can still deduct the interest on loan amounts up to $1million.  If you are married and filing separately, you can each deduct half of the amount – $375,000 or $500,000 depending on date of purchase.

Home Equity Line of Credit (HELOC)

Many homeowners have historically used a HELOC to upgrade their homes or even pay other expenses unrelated to their property.  One of the benefits of this type of loan was that interest could be written off on the homeowners’ tax return.  Under the new tax law, interest on HELOCs is no longer deductible through 2025.  The only exception is if the loan is being used to “buy, build or substantially improve the taxpayer’s home.”  The portion of the interest related to these activities is still deductible.  Second homes or vacations homes do not qualify.

Property Tax

Property tax deductibility is also limited under the new tax law.  Previously, homeowners could deduct property tax paid in its entirety – regardless of amount or number of properties.  For individuals who owned large homes or multiple homes, the total amount deducted each year for property tax could be considerable.  The new tax law has limited this amount to $10,000 per year ($5,000 per spouse if married and filing separately).  There are no exceptions and it doesn’t matter when you purchased the home.

Moving Expenses

Former tax regulations allowed for the deduction of moving expenses if the move was considered work related.  Some limitations existed including distance of move and the amount of time worked during the first 12 or 24 months.  That deduction is now completely gone except for active duty service and military members.

Capital Gains Exclusion is Still Available

Good news!  One major benefit to homeownership remained untouched by the tax reform bill: the capital gains exclusion.  Married taxpayers who file jointly can still exempt up to $500,000 in capital gains from the sale of their home (the amount is $250,000 for single filers or married filing separately filers).  To be eligible for this exemption, the home must have been the taxpayers’ primary residence for 2 of the last 5 years (i.e. rental properties or vacation homes are not eligible).  A rough calculation of your capital gains on the sale of a property is:

Sale Price – (Original Purchase Price + Improvements)

For example, if you purchased a home for $150,000 and spent $50,000 in renovations over the years you called it home, your investment in the home would be $200,000.  If you sold the home for $525,000, a single filer would be able to exempt $250,000 of capital gains but would have to claim $25,000 in gains (525,000 – 250,000 = 275,000).  A married couple filing jointly could exempt the entire $275,000 in gains because it falls under the $500,000 limit.

If you’re a homeowner, remember that the key to saving at tax time is good records!  Make sure you retain copies of your closing statement from your original purchase and receipts for any major renovations or property improvements completed.  This will help appropriately calculate your basis, or how much you’ve invested into the home, at the time you sell.  Each year be sure to gather a copy of your property tax bill and 1098 (mortgage interest statement) for your tax preparer.  These can amount to sizeable deductions and a reduction in your tax liability.  We recommend keeping all home-related records for the length of time you own the property plus seven years.

Questions about how these changes may affect you?  Levesque & Associates is happy to help!