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Federal tax overhaul hits home in refunds

Some early tax filers are receiving an unpleasant surprise: Their federal tax refunds are smaller than they expected.

The Internal Revenue Service said the average refund so far this year was down nearly 9 percent, to $1,949 from $2,135 a year ago.

If your refund is smaller than before, that doesn't necessarily mean you paid more in taxes. In fact, about 80 percent of taxpayers are expected to pay less in taxes this year than they did last year, according to the Treasury Department.

So why is your refund shrinking? Changes stemming from the federal tax overhaul that took effect last year – including adjustments to how much in taxes are withheld from paychecks that kicked in about a year ago – are likely the reason.

Here are five things to be aware of about tax filing and refunds:

•Withholding tables changed: The IRS in early 2018 changed the tables in response to the tax overhaul.

"Most people would have seen an increase in their take-home pay at that time," said Richard Wojciechowski, a partner at the Bonadio Group. "That would be part of the reason why you might get a lower refund."

So if you're not seeing the big-dollar refund check you're accustomed to, it may be partly because you've been getting a few extra dollars in your paycheck each week because your tax withholding went down.

That can have an economic impact. Some taxpayers relied on big refunds to pay for vacations or home improvements or big-ticket purchases. For some, the tax law change in withholding meant that money came back to taxpayers in dribs and drabs each week, leaving no big payback at tax time.

•A higher standard deduction: The standard deduction has essentially doubled from a year ago. For married couples, filing jointly, it's now $24,000. For single filers, it's $12,000.

"It's a huge change," said Cory Van Deusen, a tax partner at Lumsden McCormick. "It makes some tax returns a lot easier, because there's less information that needs to go into the tax returns," in the form of itemizing.

But a higher standard deduction also means that fewer taxpayers will benefit from itemizing their deductions.

"In the old days, about 30 percent of clients would itemize deductions," Mark Tronconi, a partner with Tronconi Segarra & Associates. "Now we're guessing it will be about 10 percent."

•A higher child tax credit: The child tax credit has doubled, to $2,000 per child from $1,000 per child a year ago. (To take advantage of this, a child had to have been younger than 17 years old as of the end of 2018.) The credit is refundable up to $1,400.

And more families are eligible to claim it. The income threshold at which the tax credit begins to phase out is now $200,000, or $400,000 if married and filing jointly.

At the same time, though, the IRS eliminated the personal and dependent exemptions, which were worth $4,050 for each filer, spouse and dependent. Taxpayers who don't itemize and don't have any children will come out ahead, but those with lots of kids will take a hit.

•State and federal tax rules are not necessarily the same: New York state has "decoupled" some elements of the new federal tax law, meaning, in some cases, different rules will apply to your two forms.

Even if you didn't itemize on your federal income tax return, you can still itemize deductions for your state taxes, according to the state Department of Taxation and Finance. One example: you can claim a deduction for the state and local real estate taxes you paid, including for amounts above the new $10,000 federal limit.

•Decide on your approach for next year: Different filers have different views of managing their taxes and refunds, Wojciechowski said.

"Some people, say I need to have the biggest check possible because it's my forced savings, because if it comes to me in take home pay, I spend it," he said. Others prefer to aim for essentially a break-even approach, or just pay what they owe come April 15.

"Most Americans like to see the refund because they're generally not programmed to be savers," Wojciechowski said.

Tronconi said the smaller refunds this year might surprise people who plan their finances around a bigger check.

"Quite frankly, we don't necessarily want our clients to have refunds, because that means the government's held their money all year and they've gotten paid no interest on it," Tronconi said. "But a lot of people do count on getting that money to cover their property tax bill or cover some springtime expenses."

But with interest rates on most bank savings accounts still at microscopic levels, the amount of interest a taxpayer gives up by taking a bigger refund is relatively small.

If you prefer that bigger refund check, you can do something about it for next year. Talk to your human resources or payroll department about increasing the amount of your federal income tax withheld from your pay. The IRS has a calculator on its website to assist you.

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