Surprised by a Small or Non-Existent 2019 Tax Refund? You’re Not Alone
When tax season rolls around, the news media goes into overdrive: sharing everything from restaurants that offer Tax Day deals to last minute tax-saving tips.
This year? The headlines have taxpayers feeling nervous: “If your tax refund is smaller or you owe taxes, CPAs explain why,” reads a NOLA.com article with many comments. “Seven reasons why your 2019 tax refund is so small,” makes the front page of the Sonoma Valley Sun.
So, what changed in 2018 to generate this taxpayer alarm over 2019 tax refunds?
The Big Change: Goodbye Miscellaneous Itemized Deductions, Hello Larger Standard Deductions
The reality is that for many, their tax refunds in 2019 will be similar to 2018 – or even larger. As of late March, the IRS is reporting that the average 2019 tax refund is $3,065…just $26 less than the average 2018 tax refund. Yes, that’s just an .8% decrease in refund. So why all the panic over smaller tax refunds in 2019? It comes down to deductions…
When the Tax Cuts and Jobs Act (TCJA) was signed into law in late 2017, it limited or even eliminated many deductions. For example, the income tax and real estate deduction is now limited to $10,000 – no matter how much you paid. “Itemized miscellaneous deductions” were completely eliminated. That includes everything from unreimbursed employee expenses (like mileage your employer did not pay you for), brokerage fees, personal tax prep fees, moving expenses and more. These are all gone. Period.
People that are accustomed to taking significant deductions for income tax, real estate tax, and miscellaneous itemized expenses in 2017 and years prior, would likely see a smaller 2019 tax refund – or even owe money.
Here’s the good news: For many people, the TCJA will result in tax savings and larger 2019 tax refunds. That’s because the IRS increased the standard deduction for individuals from $6,500 in 2017 to $12,000 in 2018. And no, the IRS did not eliminate the ability for folks to itemize their deductions. Stay with us here, because this is an important point: only these 9 deductions – have gone away!
You can still claim tax deductions like mortgage interest and charitable donations. However, the average American simply won’t have over $12,000 in itemized deductions to take (or over $24,000 in deductions for those filing jointly). For most, taking the standard deduction – which is now nearly double – will work in their favor.
In fact, you may be happy with your 2019 tax refund. But don’t get too comfortable! The 2020 tax season will be here before you know it. That’s why we’ve compiled a list of 5 key tips to improve your tax refund for 2020 – whether you’re singing the 2019 tax refund blues…or already planning how to spend that check from Uncle Sam.
4 Tips to Improve Your Tax Posture in 2020
1) Make Charitable Giving a Win-Win
Prior to the TCJA, many people gave generously to charities because of the win-win factor: they got a nice tax deduction, and the non-profit received a donation. However, now that the standard deductions are at $12,000 and $24,000, it’s likely that the charity will still “win” but you? Not so much. Unless you consider a donor-advised fund. It’s one of the best ways to improve your chances of a better tax refund in 2020 (sorry, again, it’s too late to impact your 2019 tax refund).
Let’s say the Johnson family donates $3,000 to their local United Way every year. In 2019, they have $20,000 in other allowable deductions (from mortgage interest to medical costs, more on that next). They are frustrated because if they donate their usual $3,000 to the United Way, they will not be able to deduct their donation on their tax return. Why? Because they will only be at $23,000 in allowable deductions ($20,000 in mortgae and medical costs + $3,000 United Way donation) – and the standard deduction is $24,000.
Now, let’s say the Johnsons instead set up a donor-advised fund (learn more about the donor advised fund process, here). They put $12,000 into the donor-advised fund in 2019. Now, the fund will dole out $3,000 to the United Way in 2019 – and over the next 3 years.
The donor-advised fund allowed the Johnsons to get the full $12,000 deduction in one year. However, the donor-advised fund makes the actual contribution to the charity of your choice over a number of years.
By contributing to the United Way through the donor-advised fund, the Johnsons now have $32,000 in standard deductions for 2019 ($20,000 in allowable deductions + $12,000 contribution to the donor-advised fund). Nice! The Johnsons are now over the $24,000 threshold by $8,000. That’s $8,000 in deductions they would have otherwise lost – now, they benefit from thousands of dollars in tax savings. And the United Way continues to receive annual support from the Johnson family.
2) Get Smart About Medical Costs
Ready for another tip to maximize your tax refund in 2020? Again, the goal is to get smart with your spending: if you can consolidate certain expenses and get over that $12,000 or $24,000 threshold, you’ll see significant tax savings.
Do you have any ongoing medical costs? Or, maybe there is a procedure you’ve been putting off – like dental work or a knee replacement. It may be worth getting those procedures this year. Why? Because the IRS allows you to deduct medical costs that exceed 10% of your adjusted gross income.
Here’s an example. Raul and Sharon Goldberg are retirees with an annual adjusted gross income of $50,000. They have $10,000 in income tax deductions, $10,000 in mortgage interest and insurance deductions, and another $1,000 in charitable deductions. That puts the Goldbergs at $23,000 in deductions they could take for 2019. However, Sharon is considering hip surgery and some dental work. If she has those procedures, the costs would add up to about $4,000 (and their regular medical costs like insurance and co-pays are at $3,000). That’s $7,000 total in medical expenses – which is more than 10% of their income. Now, the Goldbergs are over the $24,000 threshold and can deduct those medical expenses.
3) Deductions for Using Space in Your Home for a Rental or Business
Thinking of purchasing a home in 2019 that’s over $750,000? Alert! You would not be eligible to deduct your mortgage interest!
The TCJA now limits the amount of mortgage interest you can deduct on a home purchased after 12/15/17 to a $750,000 mortgage. Plus, home equity lines of credit are no longer deductible. However, if after 12/15/17 you purchase a home – and add on a home equity line of credit to your mortgage, and only use that credit for home renovations/repairs – it is deductible. Of course, there are limitations: the line of credit and the mortgage together must not exceed $750,000 total.
All hope is not lost if you take out a mortgage over $750,000. Perhaps you have a million-dollar mortgage. It’s an apartment with 4 floors – but you decide to rent out 25% of that apartment. That means a quarter of your mortgage ($250,000) is dedicated to rental property. Great, now you CAN take the mortgage interest deduction on the $750,000 of your mortgage. The same is true if you are self-employed and used 25% of your home for business. That space does not count towards that $750,000 threshold, so you are also able to take the full deduction for your mortgage.
4) Rethink Your Tax Refund in 2019…and Beyond
Financial guru Suze Orman told CNBC that “if you’re getting a tax refund, you’re making one of the biggest mistakes out there.” Wait, what? Isn’t a sizeable 2019 tax refund a good thing? Not necessarily…
Orman argues that a large 2019 tax refund simply means you gave the Federal government a nice, big, interest-free loan in 2018! Orman suggests you work with your accountant to have less money withheld by your employer (or if you are self-employed, pay more conservative estimated quarterly taxes). That way, you can invest your money throughout the year.
What’s most important than getting a big tax refund in 2019 (or any year) is to look for big tax savings throughout the year! That means maximizing your deductions, and looking for every possible (legal) way to improve your tax posture.
That’s where a qualified NYC CPA can help. Start now. It’s likely too late to influence your 2019 tax refund, but if you contact a CPA now, you can get set for a more profitable 2020 tax season.