The Economy May Also Take a Hit from Smaller Tax Refunds

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America is definitely feeling the impact from The Tax Cuts and Jobs Act (TCJA) . So far, data from the IRS has shown that the average tax refund is around 8% smaller this tax season and some taxpayers who are used to refunds are even getting bills! Working with the best CPA in Charlotte, NC can help keep that from happening! Even though the data is gloomy thus far, it’s not all because of the TCJA. We’re betting you didn’t know that your withholding was calculated incorrectly last year. Actually, when press broke last year we were warning clients it was coming and to make the appropriate adjustments ahead of time. Clients that took advantage of tax planning services were spared the brutal reality many Americans are facing now. Nonetheless, the economy will feel this impact throughout Q1 of 2019.

Reasons for Smaller Refunds

As you may already know, your employer bases the amount of tax withheld from each of your paychecks on the number of allowances you claim on your W-4. The more accurate allowances claimed leads to a more appropriate income tax amount withheld from each paycheck. When an employer doesn’t withhold more tax than necessary, your refund will naturally be smaller. The upside? Your paychecks were bigger than they should have been throughout last year. Our advice is to adjust your withholding now for 2019.

On the contrary, since the TCJA eliminated personal exemptions, many taxpayers with dependents failed to revisit their withholding numbers to reflect this change. The more allowances one takes, the less tax will be withheld from each paycheck. In July of 2018, the government warned that 30 million Americans were not withholding enough and thus will be on the line for a tax payment or simply a smaller refund.

Impact on the Economy

If the trend of smaller refund checks continues, a ballpark estimate of its impact is a $30 billion drop in disposable income for US households in Q1 of 2019 compared to last year. No big deal? Not so fast. This drastically impacts the economy since many Americans go into tax season with an expectation of a large refund. Many people will put off big purchases and the repayment of debt until the spring once they receive their expected refund. Although there is evidence that most people will pay less tax overall for 2018, the decreased size of refund checks will influence spending. This is something we’re already seeing in the retail sector for small businesses.

The US Treasury projected that 2.5 million fewer Americans will get a refund this year. Couple that with the longest shutdown in government history and you’ve got a near perfect storm for an economic stall. Interestingly, the auto industry will feel a hit in particular. Car sales are a key driver of the U.S. economy and typically see a big boost every spring as consumers turn their tax refund into a deposit on a new or used car. Without that seasonal increase, 2019 auto sales may suffer. The auto industry is one of the most important industries in the United States, historically contributing around 3% to the overall GDP.

Feeling nervous just reading this? Feel free to reach out to the best accounting firm in Charlotte, NC and let us help you! We can do more than simply prepare your business or personal tax returns but also help you plan for the economic fallout that may be lurking down the road.