Federal tax refunds this year are expected to be significantly larger than usual. This increase is largely due to new tax laws that went into effect for the current tax year, combined with many taxpayers not adjusting their paycheck withholdings accordingly.
The IRS reported that the average refund last year was $3,167, and Treasury projections indicate that refunds this year will rise by approximately $1,000 per household. Tax professionals highlight two main drivers behind the higher refunds: expanded tax benefits introduced by Congress and unchanged withholding amounts from paychecks.
Firstly, although many taxpayers’ actual tax liability decreased due to these new tax provisions, their paycheck withholdings often remained the same. Tom O’Saben, director of tax content at the National Association of Tax Professionals, explains that this mismatch results in larger refunds rather than increased take-home pay throughout the year.
Congress enacted several notable changes for the tax year, including new deductions and expansions to existing ones. Some of the most impactful modifications include:
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A larger standard deduction: Raised by $750 for single filers to $15,750, and by $1,500 for married couples filing jointly to $31,500, this adjustment lowers taxable income for millions of filers across a wide range of income levels.
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Expanded SALT deduction: Taxpayers in high-tax states can now deduct up to $40,000 in state and local taxes, a substantial increase from the previous $10,000 cap. This change may encourage more filers to itemize deductions instead of taking the standard deduction, potentially increasing their refunds.
- New senior deduction: Taxpayers aged 65 and older, with income restrictions, can take an additional $6,000 deduction ($12,000 for joint filers) on top of their standard or itemized deductions. The AARP estimates this benefit will help over 30 million seniors.
Other changes enacted include deductions for car loan interest, portions of tips, and overtime pay, along with a $200 increase per child in the child tax credit. These collectively contribute to reducing overall tax liability and boosting refunds.
Refunds can be perceived in two ways: as an interest-free loan returned by the government or as a form of forced savings. For those who struggle to save consistently, the lump sum refund can be a valuable financial boost.
However, taxpayers who prefer managing their finances actively may want to adjust their tax withholding. The IRS updated its income tax withholding tables for this year to reflect most tax changes, which may already lead to slightly higher paychecks. Still, consulting a tax advisor is recommended to ensure withholding aligns with eligibility for the new tax benefits.
Adjusting withholding requires submitting a new W-4 form to the employer. Experts advise making modest changes rather than drastic reductions. This approach helps avoid potential underpayment penalties while improving monthly cash flow.
Currently, the IRS withholding estimator has not been fully updated to account for all the latest tax changes, making DIY adjustments more complex. Careful consideration or professional guidance can ensure taxpayers maintain optimal withholding levels.
In summary, federal tax refunds will likely be larger this season due to expanded tax benefits and unchanged withholding practices from last year. Taxpayers should review their individual situations to maximize benefits and avoid surprises during the next tax cycle.
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