2018 Federal Return and Taxpayer Expectations

With the 2019 filing season it is important for preparers to be aware that, due to tax reform and the changes to the withholding tables, some of your clients may receive a surprise when they see the results on their 2018 federal return in the form of a lower refund – some may even show a balance due.

This is because of “Tax Cuts and Jobs Act” changes such as the elimination of exemptions, the increase in the standard deduction, the elimination and limiting of certain itemized deduction and elimination of certain other deductions. The taxpayers that are most likely to be affected are:

  • Two wage earner households
  • Taxpayers who itemize
  • Individuals who have non-wage income as well as W-2 wages
  • Individuals with more complex tax situations

Even though the 2018 federal withholding tables reflected the lower tax rates and the increased standard deduction, they could not fully take into account the other tax law changes such as the suspension of dependency exemptions and reduced itemized deductions. This means that for the taxpayers listed above they will have had less tax withheld from their wages than in the past which may result in a lower refund or in some instances switch them from a refund to a balance due.

The IRS encouraged individuals to review their tax situation and adjust their withholding throughout 2018; however, the vast majority of taxpayers did not do this which may result in surprised clients.

By being aware of the situation, preparers can explain to their clients what changed on their return for 2018 and what they can do to change the result of their federal return for 2019.

See the IRS news release of November 14 – For many, time is running out to avoid a tax-time surprise for more information.

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