Why You Didn't Get a Bigger Tax Refund This Year
If you expected a financial windfall while filing your taxes this year, you're not alone. The IRS has issued nearly 67,998,000 refunds in 2020, averaging $3,012 each and totalling $158,809 billion. This number is down 1.3% from the previous year.
If your tax refund turned out to be smaller than expected––or worse, you owe money to IRS––here are some possible reasons why.
Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act (TCJA) was the largest tax overhaul since 1986. It made some major changes to the federal tax code that won't expire until Dec. 31, 2025.
- Lowering the mortgage interest deduction. Before 2017, taxpayers could deduct interest on up to $1 million in mortgage loans. The TCJA now allows taxpayers to deduct interest on up to only $750,000 in mortgage loans.
- Bulking up the standard deduction. This will let taxpayers avoid the hassle of itemizing write-offs on their tax return because the bigger standard deduction would exceed their qualifying expenses. Although now, personal exemptions have been eliminated.
- The deduction for state and local property taxes have changed. The so-called SALT deductions are now capped at $10,000, which could decrease your chances of seeing a bigger tax refund if your state and local tax payments are well above that amount.
- Restrictions on individuals who suffer unreimbursed casualty losses. Before 2017, such losses were deductible if the loss exceeded $100 plus 10% of the adjusted gross income. Now, you're only allowed a deduction of such losses if they occur in a, "presidentially declared disaster area".
- Payors will no longer get to deduct alimony, but the payments will be tax-free for the ex-spouse who receives them.
Tax Refunds and Itemized Deductions
Itemizing deductions is one way to snag a bigger tax refund if you're able to substantially reduce your taxable income for the year. Tax reform, however, eliminated certain deductions that you might have claimed previously, including:
- Home equity loan interest (excluding loans used exclusively for home improvement)
- Moving Expenses (only members of the military can claim it)
- Casualty and theft expenses
- Alimony payments
- Tax prep fees
- Investment advisory fees
- Job search expenses
- Unreimbursed work expenses, including travel, meals, and parking
Increased Standard Deductions
Tax reform raised the standard deduction limits. Depending on your expenses, itemizing may lose some of its luster if your itemized deductions no longer exceed the standard deduction. For 2020, standard deduction amounts are as follows:
- $24,800 for married couples filing jointly
- $18,650 for heads of household
- $12,400 for individuals and married couples filing separately
These higher standard deduction limits are designed in part to make up for the loss of the personal exemption, previously worth $4,050. In the past, taxpayers were able to claim the exemption for themselves and their dependents, if eligible.
Changes to Tax Brackets
Another key change of tax reform involved the tax brackets. The tax code kept seven brackets but changed the marginal tax rates within each of those brackets. Tax rates decreased for 2018 but the range of incomes each bracket covered was higher. If you saw your income jump substantially in 2018 that could have resulted in a bump in your tax bracket.
Making more money—and having fewer deductions you could claim—could be a double whammy if it results in having more taxable income for the year. Subsequently, having a higher effective tax rate might mean a smaller, rather than bigger, tax refund.
If you were disappointed at not getting a bigger tax refund this year, it's never too soon to consider your tax planning efforts for next year. Here are some tips for pumping up your return or minimizing the odds of owing money:
- Contribute to a Health Savings Account (HSA) if you have a high deductible health plan since those contributions lower your taxable income.
- Funnel tax-free money into your Flexible Spending Account (FSA) if you have one of those instead.
- Increase your charitable giving efforts. The IRS now allows you to deduct charitable donations, up to 60% of your adjusted gross income.
- Use the IRS EITC Assistant tool to determine if you're eligible for the Earned Income Credit.
- Harvest losses in your taxable investment account to offset any taxable capital gains.
Keep in mind that the changes enacted under tax reform are only effective through 2025. It's a good idea to revisit your tax strategy each year to make sure you're always getting the biggest refund possible.