The number of tax refunds in the U.S. are on the rise, but the bad news for taxpayers is that average refunds are down about $500—almost 17 percent—from a year earlier, according to the Treasury Department.
Refunds will likely continue to be smaller than in recent years as a result of changes in deductions and credits and revised withholding tables, including the creation of a 10 percent cap on state and local tax deducations, that were part of President Donald Trump's tax reform package last year.
Many taxpayers, including many wealthy clients, didn’t have enough withheld through the year to make for a big refund.
Another reason tax reform is impacting wealthy clients is that the IRS can now release taxpayers’ previous overpayments associated with claiming the earned income tax credit and the additional child tax credit, according to James McGrory, CPA and shareholder at Drucker & Scaccetti in Philadelphia.
“Some of my wealthier clients who are receiving employment income are seeing refunds drop by thousands of dollars, even though in most cases their overall tax burden has decreased,” added Ann Etter, a CPA/CFP with Goodney & Associates in Northfield, Minn.
Wealthy clients who made estimated tax payments and/or who owned a closely held business from which they received a W-2 were often spared this hit because they adjusted their tax estimates or withholding right after reform kicked in, Etter said.
The Government Accountability Office (GAO) has estimated that more than one in five taxpayers will owe back taxes this year after under-withholding, which is an increase compared with the old tax law.
“It’s a year of big transition because of all the changes. How will the changes play out? No one will know exactly until you file your return,” said Edward Karl, vice president of taxation for the American Institute of CPAs, adding that for many taxpayers refunds amount to a forced savings plan.
“Most people don’t care about breaking even. They want a refund,” he added.
“At this very early point in the tax filing season, we’re still awaiting 1099 forms and Schedules K-1 before we can complete the income tax returns for many high-net-worth clients,” McGrory said. “For certain [wealthy] clients, we’re expecting their overall federal tax liabilities could be lower than 2017, especially those with taxable incomes between $300,000 and $500,000 who had been subject to the alternative minimum tax.”
The reasons, he added, are the combined benefit of the expansion of the tax brackets and decrease in tax rates, and the reduced sting of the AMT due to the increase in the exclusion amounts.