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TaxWatch: A tale of two surprising tax returns — one nasty and one nice

As of early April, the federal government has paid $5.7 billion less in refunds versus last year. Read More...

In Montana, Chris Roane was frantically re-running the numbers once his accountant broke the news. “I thought, ‘Are you serious, we owe five figures?’”

In Washington, meanwhile, Alyssa Francis’ worries vanished, and were replaced with excitement. “Yay, I don’t have to pay anything!” She breathed a sigh of relief.

Roane, 35, is reeling in his summer vacation plans and saving money so he’ll never again get smacked with a $11,500 tax bill, especially after a $7,000 refund in 2018.

Francis, 28, is enjoying her brand new washer and dryer, and waiting for a video game with her roughly $2,000 refund, up $500 from last year.

Many people were surprised and confused about an overhaul that was hailed as tax relief.

This is the tale of two tax returns that’s now playing through America in the aftermath of President Trump’s new tax law. It’s the first filing season since the 2017 reconstruction of the federal tax code.

There’s been drama at both ends of the tax return scale — relief for people like Francis, frustration for those like Roane and anxiety for procrastinators who kept putting it off. Many people were surprised and confused about an overhaul that was hailed as tax relief.

So far, this year’s average refund is $2,833; that’s $31 cheaper or a 1% decline on last year’s $2,894 average refund at this time. As of early April, the federal government has paid $5.7 billion less in refunds versus last year, according to the latest Internal Revenue Service statistics.

Don’t Miss: Did you receive zero tax refund this year? Why that’s something to celebrate

Massive tax preparer H&R Block HRB, +1.47%  recently ran the numbers on some of its repeat clients. They were being taxed much less, but only saw a small uptick in their refund check, the company said. Tax liabilities declined by 18% to 29% across all states, while the biggest refund increases were 6.7% and the biggest fall in refunds was 6.1%.

The gap between fewer taxes and middling refunds was explained by too few people updating their withholding amounts, according to H&R Block.

For many, the focus on springtime refunds might miss the point of tax reforms that enlarged paychecks during the year, said Jean Wells, a Howard University professor running the school’s Volunteer Income Tax Assistance program.

‘Intaxification’ could be a problem for people who are hit hard when they learn they’re getting no tax refund.

People have become used to getting a refund and not receiving one this year has hit them hard. Wells calls it “intaxification.”

“This tax season has been a nightmare because you have taxpayers coming at us and the refund is lower,” according to Wells. The new tax rules meant people should have readjusted their withholdings months ago, but that’s not something many taxpayers did, she said.

It’s been smoother at Acorn Financial Services, at least for the Reston, Va.-based firm’s current clients. Staffers quickly revisited the established clients’ withholdings once the new tax code came into effect, said tax director DeAnna D’Attilio. Yet recently-added clients who came in without the benefit of the talk had a rougher road, she said.

“If people are accustomed to getting big refunds, come April it’s just a shock to them” — just like $50, $60 extra included in each paycheck ahead of that, D’Attilio added.

Alyssa Francis and Chris Roane had surprises with their taxes this year. One good, the other not-so good.
New Rules

The Tax Cuts and Jobs Act, among other things, lowered tax rates for five of seven tax brackets. It nearly doubled the standard deduction, doubled the child tax credit. It also capped the previously unlimited state and local tax deduction at $10,000 and did away with personal and dependent exemption deductions.

It put lower limits on the home mortgage interest deduction and created a 20% deduction on qualified business income. An estimated 7.9 million taxpayers will end up owing money this tax season after getting a refund last year, according to a NerdWallet study.

Chris Roane is among those going from swinging from black to red. He and his wife opened the Point of Hue Salon in Billings, Mont.-based in October 2017. Roane, also a web developer, deals with the business logistics while his wife, Andrea, deals with customers.

On March 15, Chris Roane’s accountant told him he had to pay $11,500. His deadline for that payment? March 15.

Their 2017 start up costs were around $25,000 and business was “a little slow at first,” said Roane, who also detailed his story on his personal finance blog, Moneystir.com. The couple’s 2017 returns ended with about a $10,000 state and federal refund.

“It was awesome,” Roane said. “It kind of feels like free money, I know that’s not what it is.” The money helped pay down debts.

“The exact reverse happened in 2018.” He was nervous about his withholding amount, but his accountant told him not to worry. “I ignored my gut.”

Filing as a LLC/Partnership, Roane’s rude awakening came on the March 15 deadline for such returns; their accountant said the couple had to pay $11,540 in state and federal taxes — that day.

Roane and his wife needed their emergency savings fund to absorb the shock.

Don’t miss: H&R Block agents took ‘empathy training’ to handle people upset by smaller tax refunds or surprise tax bills

At the other end of the tax-refund scale, Francis had a low tax exposure because Washington has no state income tax. She opted for the standard deduction, and took her time making sure she didn’t foul up her filing through Intuit TurboTax INTU, +0.59% Francis had heard “horror stories” and was “terrified I was going to miss something.”

Francis, working at a Seattle-area school district’s information technology help desk, said friends who were single like her and around her age seemed to be raking in refunds. Not so for her married friends with kids. One co-worker and a spouse who worked at Amazon AMZN, -0.17%   “They owe, it seems, quite a bit,” she said.

Legal challenges, political divides

Roane has been left feeling vexed, while Francis has been exhaling with relief. Others have questioned the rules’ underlying fairness.

Four Democratic-leaning states with high state taxes are suing the Treasury Department over the $10,000 deduction cap for state and local taxes. The deduction limit was wrongly rammed down their throats, punishment from a Republican tax bill that didn’t garner one Democratic vote in the House of Representatives or the Senate.

New Jersey is one of the suing states. H&R Block’s analysis said its Garden State clients had the biggest drop in tax liability, 29.1%, and the second largest decrease in refunds, 5.7%.

Four Democratic-leaning are suing the Treasury Department over the $10,000 deduction cap for state and local taxes.

About 64% of Republicans in a Pew Research study said the tax system was moderately or very fair. Just 32% of Democratics thought the same thing.

Federal lawmakers looked at the new rules last month in a House Ways and Means Committee hearing.

Nancy Abramowitz, an American University law professor directing the school’s federal tax clinic helping low-income taxpayers, testified that to the extent the law “dangled the prospects of eased tax liability, tax simplicity, and improved job prospects, we have not seen any real evidence of results for the working poor.”

Douglas Holtz-Eakin, president of the American Action Forum, focusing on the business tax code changes, said it was “too early to evaluate completely the degree to which the TCJA is boosting investment, but there are clearly some promising indicators.”

Back in the state of Washington, Francis says she’s “very Democratic.” She is reluctant to credit the Trump administration with her increased tax refund. “It’s hard for me to say that Republicans are doing an okay job in this, but that’s how I feel.”

Simplify, simplify (pretty please)

From D’Attilio’s own anecdotal experience this year, more people have been helped than hurt by the new law. But she’s still had to refine the way she breaks the news to some.

For those facing liabilities, she remind them that’s because they likely earned more money in 2018. “The downside is there’s tax on that,” she said. Those will smaller than expected refunds likely received more money back during the year, she added.

Whatever the end result, the tax paperwork has not become any simpler, she said. “That absolutely has not happened in any way shape or form.”

In Montana, one of Roane’s biggest frustrations actually isn’t the money owed, it’s the complexity of the tax code. “Why can’t we come up with a simpler solution?” he said. “I long for something simpler.”

The intricacies might be part of the reasons his friends and family are all over the map on how they feel about their returns this year. “I get mixed messages from people, either being happy or upset, without anyone really understanding why.”

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