New W-4 and Its Impact on Refunds

On July 31st the Government Accountability Office (GAO) issued a Report on Federal Withholding which analyzed the impact the Tax Cuts and Jobs Act had on federal tax withholding. In this report, the GAO acknowledged that the IRS was under a short time constraint to revise the federal tax withholding tables which it did in early January and then issue a revised W-4 in February. The GAO recognized that due to the short time period, the IRS had to retain the allowance structure in the new W-4 in order to allow existing payroll systems to calculate federal tax withholding with as little disruption as possible.

One of the key conclusions in the July 31 report is that in spite of the IRS’ efforts, when compared to previous years, more individuals in 2018 will not have sufficient withholding to cover their tax liability and will not be getting a refund. The underlying reason for fewer individuals getting refunds in 2018 is caused by the new W-4  and the revised federal tax withholding tables which has reduced the amount being taken out of people’s paychecks. To address this problem, the W-4 will be revised again for use in 2019 and it will no longer use the previous allowance method that was based on personal exemptions.

The Tax Cuts and Jobs Act is expected to reduced the tax obligation that most individuals will have in 2018 when compared to 2017. However, the changes to the W-4 and the federal tax withholding tables were designed to lower the amount that is withheld from employee’s paychecks in order to immediately pass the benefits of the lower tax rates onto taxpayers. As a result, many taxpayers will be under withheld this year when they file their taxes as compared to previous years.

The GAO estimates that even though most taxpayers will have a lower tax liability in 2018, approximately 30 million taxpayers will be filing a tax return this coming year with a balance due. This represents an increase of over 3 million tax returns when compared to 2017, and many of these taxpayers may not realize that they are under withheld. The table below displays the actual percentage of returns with a balance due, with a refund and with no refund or balance due in 2017 and the anticipated percentage of returns for 2018.

 

Type of Return

20172018

Returns with a Refund

76%73%
Returns with a Balance Due18%

21%

No Refund or Balance Due6%

6%

 

The GAO concluded that much of the increase in returns with a balance due is attributed to the W-4 that was issued in February and the new federal withholding tables. Taxpayers can test their withholding by going to the IRS Tax Withholding Calculator.