Apr 23

Tax Refund Expectations (March-2023)

During tax season I have been finding a number of taxpayers are wondering why they are only getting a couple hundred dollars as a refund, if they’re lucky.  Well, the new calculation method for your W-4 is to reduce your withholding requirements and it brings your tax filing results to a minimum amount of refund.  This also means the large refunds, you normally received, from tax credits when you did your taxes, is now reducing your normal withholding tax requirements.  The credits are being paid to you in advance over the course of the year in your paycheck.  Well, the end result is there isn’t any more large refunds to pay the real estate taxes, buy a new lawn mower or refrigerator, replace the privacy fence, etc.  Additionally, it has a significant impact to divorced parents when they claim their dependent every other year.  This means each parent will need to file a new W-4, each year, to change the dependent information in Step 3, for proper withholding requirements for the coming year.  If you really didn’t like the outcome to your refund this year and would like to increase it to where it was.  You may remain compliant with the proper filing of you W-4 and elect to have an additional amount withheld by entering the amount on Step 4, line c.  In other words, if you were expecting a $2,000 child tax credit, you could divide the $2,000 by the number paychecks you will receive for the year.  This would give you the amount to have extra withheld.  For example: $2,000 divided by 52 paychecks for the year equals approximately $40 a paycheck extra needs to be withheld and resulting in you getting your $2,000 at the end of the year.  This is your choice, get it now through the year with a minimum refund, or adjust it for the larger refund for the end of the year.  I know it’s confusing and you may need to talk with a tax professional to help you understand this better.  On another note, this also means there isn’t any funds available to cover unexpected taxable income when there isn’t any tax withholding done.  This may result in an estimated tax payment requirement to avoid the underpayment of estimated tax penalty.  One other thing to remember, when you take a distribution from a 401(k) there is a requirement to have up to 20% withheld for taxes.  This gives you the false pretense this will cover the tax on this distribution.  This is not correct if you’re under 59 ½.  The distribution is subject to withholding tax and a majority will be at 12% or 22%.  There is also a 10% premature distribution penalty for being under 59 ½.  Add the two together, the tax liability resulting is 22% or 32% and with only 20% withheld, you can see more will be owed on the distribution.  The problem is, since there isn’t any extra refund dollars to cover the difference.  So, evaluate your circumstances when the funds are distributed or you may a have a surprise when you do your taxes.  That’s it for this month.  More good tax stuff next month.  Remember, this is a very brief overview.  It is your responsibility to discuss any tax and financial changes with your professional advisor for assistance in evaluating your situation.  For details and specific assistance in applying the general information in this article, you may contact our office at your earliest convenience or contact your advisor.   Provided by Tracey C. Higginbotham, E.A., (321) 632-5726, a member of the National Society of Accountants.