Another year, another tax season has come and gone. The end of tax season is a bit like the scene at the end of an action movie or western where there’s a big shootout and suddenly the main character has finally defeated the big baddie (while likely taking some damage themself as well). All at once, as the villain falls to the ground, the entire scene goes quiet. Everyone looks around as if to ask one another: “Is it over?” Someone peeks their head out from behind a wall, then someone else, and then someone else. Eventually, everyone begins to emerge from the lingering dust, taking stock of everything that just happened—yes, the fighting is over, but what’s gonna happen next? And what about everything that happened before? It’s no different with tax season: as the dust settles, you may find yourself wondering about the stress you experienced leading up to the final moments and the uncertainty you feel heading into what’s to come.
Uncertainty can be frightening, and when it comes to uncertainty surrounding taxes, it can be costly as well. At Payday HCM, we’ve seen many tax seasons come and go throughout our 40 years as a business. In that time, we’ve helped many clients get through tax season with the least amount of stress, hopefully saving some time and money in the process. However, we’re not just interested in helping our clients: We want to ensure every person, whether you’re a new small business or an established enterprise, has the resources they need to navigate tax season with ease—regardless of whether you’re a client of ours or not.
That’s why, in this article, we’ll be taking a look back at this year’s tax season and mapping out the possible road ahead heading into next year’s. We’ll look at some of the common questions asked coming out of this year’s tax season and heading into next year’s, especially as it pertains to W-4 withholding and the Tax Cuts and Jobs Act of 2017. We’ll go over what you might’ve missed this year as well as what to keep in mind heading into the next year so that you have the knowledge to approach next tax season with confidence.
In this article, you will learn:
- Why Was My Refund So Low?
- What If The TCJA Expires?
- Key Takeaways From This Year And What To Keep In Mind For Next Year
Why Was My Refund So Low?
Firstly, we’ll start with the question that (almost) everyone is probably asking: why is my tax refund so much lower this year when compared to last year?
W-4 Withholding
Now, while there may be many reasons a tax refund could be lower than the year previous (selling stock, change in marital status, receiving unemployment benefits, etc.), one of the bigger ones that can often end up overlooked is your W-4 withholding amount. This is a big one, especially considering how the withholding process has changed in recent years.
When you start a new job, you’ll have to fill out a W-4 form. This form helps your employer figure out how much money should be taken out of your paycheck for federal income taxes. The trick here is a W-4 doesn’t have to be filled out only when you start a job—in fact, you should be filling out a W-4 if you receive a raise from your job, add a new job, change marital status, or add or lose a dependent.
Allowances vs. Dollars
Now, let’s say none of the above things happened, but your tax refund was still lower—what gives? Well, if you haven’t changed jobs in some time or haven’t updated your W-4 form in a while, it’s possible that some changes to the form could be responsible for your lower refund.
In 2017, the Tax Cuts and Jobs Act was signed into law. This act changed the way individuals calculate their withholding, shifting from an allowance system to simply calculating a dollar amount. This was because the act removed personal tax exemptions, therefore making it necessary for the IRS to find a new way to calculate withholding.
The change in the W-4 form did not invalidate the old W-4 forms, however. If you’ve been at one job since the passage of the act and haven’t filled out a new W-4 form in a while, it’s possible the change could have led to a lower tax refund. The IRS does have withholding tables to account for this, but without careful filing, things can slip through the cracks.
What If The TCJA Expires?
Now, with all this talk of the TCJA and W-4 withholding, it’s important for us to look ahead at how the tax landscape might change next year with the possible expiration of the TCJA.
Changes To Individual Tax Credits And Standard Deductions
The TCJA introduced a number of changes in addition to the ones mentioned above that led to the alteration of the W-4 form. Some of the bigger ones include increasing the standard deductions to $12,000 for individual filers, $18,000 for head of household filers, and $24,000 for joint filers, as well as lowering some of the individual income tax rates.
With the TCJA set to expire at the end of 2025, barring congressional action, these changes would go away. The TCJA also enacted changes to the child tax credit, increasing the amount from $1,000 to $2,000 while changing the phaseout threshold to $200,000 for unmarried filers and $400,000 for joint filers.
Qualified Business Income (QBI) Deduction
One of the bigger deductions introduced by the TCJA is the qualified business income deduction. This deduction is aimed particularly at self-employed individuals and small businesses and allows them to deduct up to 20 percent of their QBI. There is a set of qualifications and exceptions that exist for the deduction.
With the expiration of the TCJA, businesses would no longer be able to deduct their QBI and would instead be taxed at individual tax rates. Now, it is important to note that the QBI deduction was one of the main selling points for getting the TCJA enacted, so keep an eye out for a possible extension.
Key Takeaways From This Year And What To Keep In Mind For Next Year
Now that we’ve covered two of the bigger sections that affected this year’s tax season and what might impact next year’s, we’ll briefly summarize the key points from this year and what you should keep in mind for next year.
Filling Out A W-4 And Ensuring Correct Withholding
When it comes to takeaways from this year’s tax season, there probably isn’t a more important one than ensuring your W-4 withholding is correct. Correct withholding can mean the difference between receiving a sizable refund or owing more than you’d like to the IRS (of course, the perfect scenario for withholding is neither and just paying the correct amount).
If you haven’t updated your W-4 to account for the new allowances system, it would probably be a good idea—even with the uncertainty surrounding the TCJA. Even if the W-4 form ends up changing again in the future, frequently updating your withholding is still a good practice, especially if your income frequently fluctuates.
Keeping An Eye On The Tax Cuts And Jobs Act
The most important thing to keep throughout this year and heading into next tax season is the expiration of the TCJA. There are many angles to consider here: while the TCJA has provided value to individuals and small businesses with its increased deductions and the QBI credit, the Congressional Budget Office estimates the TCJA will add $1.5 trillion to the federal deficit over the next decade—that number would go up to $4.5 trillion if extended as-is.
For businesses and individuals, it would be best to create an action plan for either outcome. You’ll want to be prepared to possibly lose a tax credit or have a lower deduction amount. Either way, the most you can do when it comes to the TCJA is wait.
Don’t Let Tax Season Be Taxing
Sometimes, tax season can feel like a battle. When you’re in the midst of it, you may feel like the hero in the story when they’re at their lowest point. You feel as if there’s nothing more you can do, that you can’t do what has to be done. You’re overwhelmed, you’re stressed, and, worst of all, you may feel like you’re out of options. It doesn’t have to be this way, though: with the proper research and preparation—including reading this article—you can get the right boost you need to get back into the fight and save the day.
Of course, a hero is nothing without all the people who helped them along the way, and we don’t want tax season to sneak up on you. Staying one step ahead can make the difference between timely filing and paying costly penalties. Check out our breakdown of employer taxes to ensure your business is in the know on all things taxes.
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