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).

Standard Deductions$6,350$12,000
Total Tax Liability$5,100$4,100

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.

Total Tax Liability$12,750$16,150

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).

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).


Estimated Payments – Who, What, When, Where, Why and How?

Some taxpayers hate making estimated payments.  Some taxpayers avoid it.  Others dread the day they might have to make them.  In reality, though, estimated payments are really not that much different than paycheck withholdings for W-2 employees.  For every paycheck received, Medicare, FICA, State, Federal, etc. is withheld from the employee’s earnings.  That money is sent off to the appropriate organization and a credit is given to the employee for payments made and are called “Withholdings.”  When that employee completes their annual tax return, they will enter the amount withheld.  If total tax due is less than the amount withheld, the balance is returned to the employee in the form of a refund.  If the amount is more, a balance is due.

For those taxpayers making estimated payments, a payment is made quarterly (instead of each pay period) and instead of being withheld from a paycheck it is paid directly from the taxpayer to the Federal and/or State government.  Just like with W-2 employees, when taxes are filed it may be determined that the taxpayer overpaid, and a refund will be issued.  Similarly, if underpayment is discovered than a balance is due.

See?  Estimated payments really aren’t all that bad!  Keep reading to learn more about the Who’s, What’s, When’s, Where’s, Why’s and How’s of estimated payments.

  • Who must make estimated payments?

Those taxpayers who expect to owe at least $1,000 in tax for the year and will have less than the expected amount withheld from their paycheck (W-2 employees) should make estimated payments.  Additionally, most self-employed and 1099-receiving taxpayers should also make estimated payments throughout the year.  Note that if you are a W-2 employee who has earnings outside of your regular job (such as investments, inheritance, a side-job, etc) you may still need to pay estimated tax in addition to what is being withheld from your paychecks.

  • What are estimated payments?

Estimated payments are not a prepayment of tax liability, despite what most people think.  Income taxes are technically due as the money is earned/received.  This is known as a pay-as-you-go system.  In other words, taxes are not due April 15th (even though tax returns are) – they’re do periodically throughout the year.  Hence estimated payments are timely payments of the tax you believe you will owe over the entirety of the year.

  • When are estimated payments due?

Estimated payments are made four times throughout the year.  Due dates are as follows:

PeriodDue Date
January 1 – March 31April 15
April 1 – May 31June 15
June 1 – August 31September 15
September 1 – December 31January 15 (of the following year)

  • Where do you make estimated payments?

You have many options for making your federal estimated payments – learn more here:

  1. Mailing check or money order to the Internal Revenue Service
  2. By phone
  3. Through by setting up direct pay with your bank account or with a debit/credit card

You may also be required to make estimated payments to the state.  Note that if you live and work in separate states you may be required to make payments in one or both states.  Check with your tax preparer or your state’s Department of Revenue for payment options and instructions.

  • Why should you make estimated payments?

First and foremost, estimated payments prevent the need to pay a large tax bill at the time you file your return.  You can wait until April 15th each year to give the IRS their cut, but which sounds easier: writing 4 checks for $2,500 or 1 check for $10,000?

The second reason is the pay-as-you-go system we mentioned earlier.  Tax isn’t due April 15 – it’s due as it’s earned.  This means that without estimated payments being made, or adequate amounts being withheld from paychecks, you may have to pay penalties even if you pay your tax liability by April 15th each year.  If total tax due after estimated payments and withholdings is less than $1,000 then penalties are typically avoided.

  • How are estimated payments calculated?

If you expect no significant changes in household income and deductible expenses from a previous year, you can divide the total tax liability calculated on your previous tax return by 4 to get your payments for the current year (this may not work for tax year 2017-2018 due to tax law changes).  If you have changed jobs, gotten married (changing your household income and filing status), had children, made investments, etc., then calculating estimated payments will likely be more complicated.  In this situation payments can be calculated by estimating your income for the coming year, calculating the taxable income, calculating the tax on that amount, and dividing that tax liability into 4 equal payments.  It is recommended that you check with your tax preparer to more accurately calculate your expected tax liability.

The IRS generally recommends that taxpayers make their estimated payments in 4 equal payments due on April 15, June 15, September 15, and January 15.  However, there are exceptions.  For example, maybe you work in an industry that is seasonal and you do not earn income evenly throughout the year.  If that is the case, you may be able to lower or avoid payment penalty by using the annualized installment method.  Learn more at or check with your CPA.

Think you may need to make estimated payments?  We can help!  Get in touch with Levesque & Associates for more information.

Don’t Blow Your Refund! Why You Should Consider Using an IRA

In 2017, the average refund received was just under $3,000.  Receiving a refund is exciting and many tax payers utilize the funds to pay down debt, add to a rainy day account, make a large purchase, or apply it to next year’s taxes (which is still a good idea if you pay quarterly).  Did you know there’s something else you can do with that money?  Consider using the direct deposit option and sending all or part of your refund directly to an individual retirement account (IRA) – helping your retirement savings grow!

You are able to direct all or part of your refund into a traditional IRA, a Roth IRA, or a SEP-IRA.  You cannot use a SIMPLE IRA.  For both tax year 2017 and 2018 you are a able to contribute up to $5,500 for a Roth or Traditional IRA.  If you are 50 or older you may contribute an additional $1,000 (known as a catch-up contribution) for a total of $6,500 annually.  Income limitations exist so check with your CPA about your eligibility.

You also have the option of directing your refund into a health savings account (HSA).  This is a great option for anyone, but especially those nearing retirement who haven’t built up savings in a HSA.  Why?  Many retirees take money from their 401k to pay medical expenses, but then have to pay taxes on the money they withdrew.  HSA dollars used for qualified medical expenses are not taxed.  For 2018, HSA limits for self-only coverage increased from $3,400 (2017) to $3,450.  For families, the limit is up to $6,900 ($6,750 in 2017).  There is also a catch-up contribution limited to $1,000 for those who are 55 or older (the same for 2017 and 2018).

Worried you may need the refund for an emergency?  Then consider using a Roth IRA.  This type of account will allow you to take back your original contribution without paying taxes or penalties.  If you don’t end up needing the money, it will continue to grow in the account.

You can still designate the deposit for the 2017 tax year as long as the deposit is made by April 17, but you’ll need to call the company to request the deposit count towards 2017 – otherwise it will automatically be designated for 2018.  If you plan to apply it to tax year 2017, be sure to file early!  The deadline is for the deposit, not the day of filing.

Will you owe taxes this year?  Talk to your CPA about funding a traditional IRA.  He or she can tell you how much money you need to put into an IRA to reduce your income tax liability.