2018 1040s: Where the TCJA rubber meets the road

The spotlight is an uncomfortable place to be. The preliminary word from news organizations, including Politico, ABC News, NBC News, the New York Times and the Washington Post is that so far employees are really, really unhappy with their tax refunds, or lack thereof. And almost everyone is pointing their finger at the 2018 withholding tables.

These anecdotal reports reinforce what the General Accountability Office said last year, when it concluded that about 30 million employees would be underwithheld after the Tax Cuts and Jobs Act than before.

The IRS, for its part, churlishly responded that lower refunds or no refunds aren’t its fault. After all, it publicized the withholding calculator numerous times last year, and, besides, employees got more in their paychecks last year (we won’t go back over how ridiculously difficult that calculator was to use). It probably would have been better if it said nothing.

So to mash up a phrase from the movie Ghostbusters, who they gonna blame? You.

The filing season, so far

Tax refunds are down about 8% this year, according to the IRS’ latest weekly filing season stats. To be fair about this, the stats may change as the filing season rolls on, as was pointed out in a tweet by the Treasury Department.

Could it be the withholding tables? There was a lot of concern last year that the IRS manipulated the withholding tables to give employees more money in their paychecks without much thought to the 1040 reconciliation process. It’s possible, but we work with the withholding tables every year and last year’s tables didn’t seem out of whack.

The withholding tables did account for changes made by the TCJA. But equally important, was the IRS’ year-long emphasis on accuracy. The IRS said time and time again that it wanted withholding to more accurately reflect taxpayers’ tax liability. Translation: Lower refunds. But in its fixation on accuracy, the IRS simply forgot that taxpayers really like, and count on, their tax refunds.

The IRS is providing relief from the income tax underpayment penalty to taxpayers who paid at least 85% of their 2018 income taxes through withholding, quarterly estimated taxes or some combination of the two. To avoid the underpayment penalty, you must normally prepay 90% of your tax liability.

This relief, however, isn’t enough for Ways & Means Oversight Subcommittee Chairman John Lewis (D-Ga.) and subcommittee member Judy Chu (D-Calif.), who want the IRS to drop the percentage for relief down to 80%. They’re also blaming the withholding tables for employees’ underwithholding.

Not helping the situation, the IRS has been issuing press releases on how taxpayers can pay their tax bills.

You have some communicating to do

We looked back at our memo templates to you last year, here, here, here and here. We intended for you to use these templates to explain to employees how the TCJA might affect their taxes.

Perhaps we assumed too much, so you did too. According to a recent survey conducted by H&R Block, only 46% of employees said they felt prepared to update their W-4s by themselves and only 19% updated their forms in response to the TCJA. Additional survey results show the following:

  • 40% reported that they updated their W-2s (this can’t be done)
  • 45% were unsure what elements go into a withholding allowance
  • 42% knew that W-4s are filed with their employers, 27% thought W-4s were filed with the IRS and 7% thought W-4s were filed with the Social Security Administration.

Those are pretty depressing stats.

If our memo templates fell short, perhaps the IRS and the American Payroll Association can do a better job. They have jointly created a new one-page publication, Pub. 5330, The New Tax Cut Law Will Impact Your 2018 Tax Return. The pub also alerts employees to how they can prepare for this year’s taxes and specifically mentions refiling their W-4s with their employers.

You can download this pub from the IRS’ website and stuff it into employees’ pay statements.