Wondering why your paycheck didn’t grow as much as you’d hoped after last year’s tax cut?
The fault may lie in your withholding allowance, a choice most U.S. workers make when they join an employer and seldom update – and one that economists at investment bank Morgan Stanley say may mean a windfall for taxpayers in early 2019.
Even before a GOP-controlled Congress approved a massive corporate tax cut that also reduced individual rates in most of seven escalating tax brackets, employers were withholding more from paychecks than workers would actually owe. It’s the reason why taxpayers received $235 billion in refunds this year through the April 17 federal filing deadline.
While about 90 percent of workers saw higher take-home pay after the bill, which nearly doubled the standard deduction while slashing itemized allowances, that “does not mean workers are getting all that’s owed them,” economists led by Ellen Zentner wrote in a report.
As much as 75 percent of employees have too much money taken from their paychecks, and research suggests they “only partially adjust withholding rates when tax laws change,” according to the report.
“This means that workers are likely to be even more significantly overwithheld this year,” she added, potentially boosting refunds by $62 billion, or 26 percent.
Indeed, the Treasury Department urged taxpayers earlier this year to review their withholding to make sure they were getting the full benefit of the cut, highlighting an online withholding calculator designed to help with the math.
“This is a pivotal and exciting time for American workers,” Treasury Secretary Steve Mnuchin said at the time, “The ‘paycheck checkup’ will allow employees to keep more of their hard-earned money.”
Treasury’s message may not have been purely altruistic, Zentner noted. The U.S. debt ceiling, suspended until March 1 under the 2018 budget bill, goes back into effect at roughly the same time the department usually issues a large portion of refunds.
“An unanticipated surge in tax refunds could create uncertainty at a time when the debt ceiling is approaching, and it has to rely on cash balances to cover refunds until tax receipts begin pouring in,” Zentner said.
In 2018, roughly 45 percent of refunds were sent in February, she said. If that pattern holds, “the bulk of the refund burden would hit before the debt-ceiling deadline,” leaving Treasury with a cash balance similar to the $215 billion it had this year.
While that should be more than enough to cover the remaining refunds until revenue picks up after the April 17 filing-and-payment deadline, evening out withholding earlier would ease the cash-flow constriction.
Refunds in the month-and-a-half period might reach $140 billion, based on a 26 percent increase from 2018’s payouts, Zentner projected.
Based on this year’s trends, the lion’s share of the money returned to taxpayers in early 2019 money may be used to pay down debt or boost savings, with the remainder spent on shopping, vacation or big-ticket items like cars.
A February 2018 survey by the National Retail Federation, an industry lobbying group, showed 49 percent of taxpayers expecting a refund planned to save it while 35 percent said they would repay creditors.
