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Tax Time Kickoff Series: Part III-How Can I Plan for Changes to My Refund?

As we kick off tax season, the Center and Budget and Policy Priorities’ Get It Back Campaign and the Financial Clinic have teamed up to help you sort through what tax reform might mean for your refund, and what you can do to make the most out of tax time. This the final post in this three-part series.

If your refund is higher or lower than expected:

Be sure to adjust your tax time saving and spending plans accordingly. The recent tax reform changes impact the amount of taxes that need to be withheld from paychecks over the next few years. You may want to use this tool to see if you need to change your tax withholdings to plan for next year’s tax time.

Form W-4 is used to adjust the amount of taxes withheld from your paycheck. You can adjust your Form W-4 with your employer(s) to get your refund throughout the year, or to get a larger refund at tax time. You may prefer a smaller tax refund to get more of your money throughout the year in each of your paychecks. Or, you may find a larger tax refund useful to help “automate savings” once a year.

If you owe the IRS or your state after filing your return:

If you owe unexpected tax, know that you have several options to pay it. You can pay at the time of filing and up to the April 15 filing deadline. If you cannot pay the full amount, pay what you can to minimize interest and penalty charges. Let your tax preparer know that you would like to set up a payment plan. They can help you complete Form 9465, Installment Agreement Request. IRS charges interest and fees while you are on a payment plan, but tend to be very flexible about helping you with a payment amount you can afford. If a payment plan will cause financial hardship, you may be able to settle your tax debt for less than the full amount or request the IRS temporarily delay collection until your financial situation improves.

Low-Income Taxpayer Clinics (LITCs), typically help with addressing IRS-related tax disputes and can help with audits, tax collection matters, and reducing fees or penalties if you are eligible. Call your local 3-1-1 or 2-1-1 to find the nearest LITC near you. A financial coach can also help if you have questions about developing affordable payment plans or reaching out to IRS.

To avoid owing taxes next year, follow the steps above to make adjustments to your Form W-4. Increasing your withholding means each of your paychecks will be smaller; however, the amount of taxes taken from your paycheck will be greater, making it less likely you’ll owe when you file your taxes.

If your refund has changed due to recent tax law reforms:

It may be a good idea to talk to a financial coach who can help you make a spending plan and set some financial goals that take into account how recent changes may have affected you this tax season.

Many organizations across the country provide financial coaching free of charge. Call your  3-1-1 or 2-1-1 hotline if it exists in your area, or contact your local United Way or other trusted community organization to see if they can refer you to a financial coach. Your city government may even provide coaching through a Financial Empowerment Center.

In New York City? You can schedule an appointment with one of the Clinic’s expert financial coaches.

Are you a financial coach or nonprofit practitioner? Check out our Tax Time Mini-Toolkit to access tax-related coaching tools for your customers.

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Be sure to check out other helpful blog posts from both the Get It Back Campaign and The Financial Clinic.

We hope this helps you get started planning for tax time! Be sure to check out Parts I and II of the series:

Part I: What Tax Reform Changes Should I Know About?
Part II: How Can I Make the Most of My Tax Refund?

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This blog series is co-authored by The Get It Back Campaign and The Financial Clinic. Be sure to check out other helpful blog posts from The Get It Back Campaign and the Financial Clinic.

The Get It Back Campaign helps eligible workers claim tax credits and use free tax filing assistance to maximize tax time.

The Financial Clinic builds working poor people’s financial security through direct services, partnerships that embed financial security practices into nonprofits nationwide, and policy campaigns in support of working families.

Tax Time Kickoff Series: Part II- How Can I Make the Most of My Tax Refund?

As we kick off tax season, the Center on Budget and Policy Priorities’ Get It Back Campaign and the Financial Clinic have teamed up to help you sort through what tax reform might mean for your tax refund, and what you can do to make the most out of tax time. This is part two of a three-part series.

 

Now that you have an idea of tax law changes that may influence your tax return it is time to think about how you can maximize your refund. Before you receive your refund or even file your taxes, you can make a plan for the additional income. Having a plan can keep you on track so that your tax refund helps get you closer to your financial goals. Additionally, by planning ahead, you can bring the right materials to your tax appointment and ask questions to help ensure everything goes smoothly.

Here are some suggestions to help you maximize your refund:

  • Plan to split your tax refund
    • Bring your checking AND savings routing and account numbers to your tax preparer (we recommend checking out a VITA site!). Tell your preparer you want to split your refund using Form 8888. This allows you to save a portion, and keep a portion for spending in your checking account. Decide what percentage of your refund you want to save ahead of time. In 2018, 1 in 5 VITA site customers surveyed at the Financial Clinic planned to save 50 percent of their tax refund.
  • Pledge to save part of your refund
    • Through America Saves, you can get a text message reminder about your pledge to save. This can be one-time savings or monthly savings.
  • Save for future educational expenses
    • Using tax Form 8888, you can put part of your federal return into a college savings account by listing the routing and account number for the savings account on the form.
    • In Arkansas, California, Hawaii, Maryland, Missouri, Oregon, Pennsylvania, Utah, Virginia, and New York, you have the option to split your state refund and place part of it into a 529 account for your dependent’s future educational expenses.
    • In Colorado, Delaware, Ohio, and Illinois you also have options to deposit state refunds directly into a 529 account, but not the option to split your refund.
  • Purchase savings bonds
    • Your tax return is one of the easiest ways to get a U.S. Savings Bond, and bond rates are higher than they’ve ever been. Ask your tax preparer about putting a portion of your refund towards a savings bond. You’ll use the same federal form, Form 8888  purchase savings bonds.
  • Participate in a savings program
    • SaverLife is a free online program where you can earn prizes for saving. SaveYourRefund is another program where you can enter cash prize drawings when you save a portion of your refund. Ask if there are any local savings programs in your community.

Making the most out of your refund once you receive it.

You’ve made your plan, filed your taxes, saved a portion of your refund, and received your refund. Now what? The next step is deciding what to do with the remainder of your refund.

Here are some suggestions from the Financial Clinic’s  coaches and customers:

  • Pay bills
    • Many customers like to use their refunds to pay bills in advance– like car insurance and rent– to help reduce stress.
  • Pay off debt
    • Using your refund to pay off your debt can make it easier to save throughout the year.
  • Treat Yourself!
    • Allow space to treat yourself to something small with your refund. This will make it less likely that you will be tempted to dip into what you plan to keep saved.

We hope this helps you get started planning for tax time! Be sure to check out our first blog in this series, and check back later in the week for “Part III: How Can I Plan for Changes to My Refund?”.

Do you provide financial coaching to others? Check out our Tax Time Mini-Toolkit to help you have tax planning conversations with the customers you serve

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Be sure to check out other helpful blog posts from both the Get It Back Campaign and the Financial Clinic.

Part I: What Tax Reform Changes Should I Know About?
Part III: How Can I Plan for Changes to My Refund?

***

This blog series is co-authored by The Get It Back Campaign and The Financial Clinic. Be sure to check out other helpful blog posts from The Get It Back Campaign and the Financial Clinic.

The Get It Back Campaign helps eligible workers claim tax credits and use free tax filing assistance to maximize tax time.

The Financial Clinic builds working poor people’s financial security through direct services, partnerships that embed financial security practices into nonprofits nationwide, and policy campaigns in support of working families.

Tax Time Kickoff Series: Part I- What Tax Reform Changes Should I Know About

As we kick off tax season, the Center on Budget and Policy Priorities’ Get It Back Campaign and the Financial Clinic have teamed up to help you sort through what tax reform might mean for your tax refund, and what you can do to make the most out of tax time. This is part one of a three-part series.

This year, tax time brings several changes that could impact your federal tax refund and change how you file your taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 includes some changes that could leave you with a tax refund different from what you were expecting. Here are six tax law changes you should know:

  1. New tax rates
    •  The amount of tax you pay is based on your income bracket. When you file your taxes this year, your tax bracket may be slightly lower or higher, depending on your annual income.
    • Two other factors that influence the amount of taxes you owe include other tax credits you are eligible for and the amount of taxes you paid in advance throughout the year.
  2. Eliminated exemptions
    • In the past, you could claim personal exemptions for yourself and your tax dependents. These exemptions reduced your taxable income, lowering the amount of taxes you pay. Now, you can no longer claim these exemptions. If your family has one or two dependents, the new standard deduction provides a similar benefit (see #3). If you have more dependents, the elimination of personal exemptions means that more of your income may be taxable.
  3. Increased standard deduction
    • The standard deduction, like other tax deductions, reduces your taxable income, which lowers the amount of taxes you pay. The new standard deduction has nearly doubled, helping to offset the elimination of exemptions.
    • Here’s how the new standard deduction compares to last year:
    • [table id=2 /]
  4. Child Tax Credit changes
    • The Child Tax Credit helps offset the cost of raising children by giving you money back at tax time. There are three significant changes to the Child Tax Credit (CTC):
      • Amount – The CTC is now worth up to $2,000 for each qualifying child under age 17. Previously the credit was worth up to $1,000 per child.
      • Minimum income – If you earned more than $2,500 in 2018, you may be eligible for the refundable part of this credit worth up to $1,400 (also known as the Additional Child Tax Credit). This means that even if you don’t owe taxes, you will still receive the refundable portion as a tax refund.
      • Taxpayer identification requirement – Children you claim for the CTC must have a valid social security number (SSN) that authorizes work. As the tax filer, you and your spouse (if present), can have an Individual Taxpayer Identification Number (ITIN) or an SSN.
  5. New Credit for Other Dependents (“Family Tax Credit”)
    • As part of the changes to the CTC, there is a new $500 non-refundable tax credit available that you can use to claim dependents. This includes children 17 and older, children with ITINs, and other relatives (for example, dependent parents). Since this credit is non-refundable, it only helps reduce the taxes you owe and doesn’t provide a refund.
  6.  Itemized Deduction Changes
    • If you filed Schedule A in the past, there are several changes to itemized deductions. Three that you should know about include:
      • State and local taxes – The amount you can deduct for state and local income taxes, real estate taxes, and personal property taxes is limited to a combined total of $10,000 ($5,000 if married filing separately).
      • Home mortgage interest – Interest on home equity loans is no longer deductible. This is one of several changes to this deduction.
      • Medical expenses – Medical and dental expenses are deductible if they are more than 7.5 percent of your adjusted gross income (AGI), which is the same as last year. This will increase to 10 percent of your AGI in 2020.

What else do you need to know?

  • These tax law changes are temporary. These changes are effective when you file your taxes this year for the 2018 tax year, and expire after 2025, unless otherwise noted. In 2026, these tax laws changes are set to revert to previous levels.
  • Professional free tax help is available. There are other changes under tax reform that may affect you. Since there are several factors that can influence the amount of taxes you owe and the size of your refund, it is important to get tax help from a qualified tax preparer. The Volunteer Income Tax Assistance (VITA) program has a network of experienced tax professionals who provide tax preparation for free. Volunteers receive specialized training and must pass a certification exam annually. (There isn’t a similar requirement for paid tax preparers.) Learn how to find a free tax site near you or call your local United Way 2-1-1 service line.
  • There are new tax forms. This year, there is one Form 1040 to file (two half-sheets) with other forms available. This form replaces Forms 1040A and 1040EZ. Additional forms that you need to file depend on your personal tax situation.
  • Refund delays continue. The Protecting Americans Against Tax Hikes (PATH) Act of 2015 requires tax refunds that include the Earned Income Tax Credit or Additional Child Tax Credit to be held until February 15 so the IRS can check your income against what your employer reported. The IRS strives to issue refunds within 21 days of processing, however, additional delays are possible following the partial government shutdown. If you’ve submitted an ITIN renewal with your tax return, expect further delays since your ITIN application must be processed before your tax return.

We hope this helps you get started planning for tax season! Be sure to check back next week for Parts II and III of the blog series:

Part II: How Can I Make the Most of My Tax Refund?
Part III: How Can I Plan for Changes to My Refund?

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This blog series is co-authored by The Get It Back Campaign and The Financial Clinic. Be sure to check out other helpful blog posts from The Get It Back Campaign and the Financial Clinic.

The Get It Back Campaign helps eligible workers claim tax credits and use free tax filing assistance to maximize tax time.

The Financial Clinic builds working poor people’s financial security through direct services, partnerships that embed financial security practices into nonprofits nationwide, and policy campaigns in support of working families.

When the Government Shuts Down, the Vulnerable Suffer the Most

Michael Dedmon | Policy Manager| The Financial Clinic

While a partial shutdown of the federal government dominates the daily news cycle, the real impact on people’s lives can be hard to see because many essential services continue to function – more or less – as normal. For example, the U.S. Postal Service is still running, Social Security payments continue to be made, many Veterans’ services are still available, and federal employees deemed essential like federal transportation safety workers and military personnel continue to report to work each day. But, beneath the surface, this staged political crisis is already generating more significant consequences than many realize, and the risk of a deeper national crisis rises every day the impasse continues.

Up to 450,000 of these government employees won’t be receiving a paycheck this Friday despite working throughout the shutdown, and there are thousands more who have been furloughed while the negotiations over reopening the government continue. Although the majority of the furloughed and all essential employees will receive back pay for the time lost to the shutdown, many staff working for government contractors, like cleaning and food service employees, will not. This loss of income presents a huge risk to these less financially secure employees who already receive significantly fewer protections and are paid much less.

Nearly 80% of Americans report that they live paycheck to paycheck, and over 40% of families lack emergency savings, claiming that coming up with $400 would pose a significant financial burden. Like many workers across the country, federal employees have seen their incomes stagnate in the past decade, allowing them even less flexibility to deal with unplanned instability. This sudden shock to their income will force many of them into tough financial choices like whether they should pay their rent and utility bills or buy groceries. Like so many other households dealing with income volatility, many families will be forced to rely on risky and expensive credit products to make ends meet.  As the shutdown drags on, it’s critical that we not lose sight of the very real impact this disruption has on the financial lives of federal employees and their families, and consider the long-term effects some will feel after the political disputes are resolved.

In addition to these affected employees, a number of vulnerable households across the country that rely on government services will soon start to feel the consequences of the shutdown. The Washington Post reports that the Department of Housing and Urban Development (HUD) is scrambling to prevent the eviction of over 1,000 people receiving support from a federal program that ended on January 1st, and in just weeks, millions of SNAP beneficiaries could face reductions to their benefits. Also, with tax season just around the corner, the IRS is both unable to process tax refunds and will have to delay critical support it provides to nonprofits, like The Financial Clinic, that participate in the Voluntary Income Tax Assistance (VITA) program. The Post has reported that over 90% of Internal Revenue Service (IRS) staff has been sent home without pay just weeks before tax season begins in earnest.

This is especially poorly timed this year as changes to tax law passed by Congress in late 2017 spell a number of important changes that may impact low- to moderate-income (LMI) households this season, including the elimination of the personal exemption, the introduction of new tax brackets, and alterations to the Child Tax Credit. “With the new tax law changes starting this year, VITA customers will be looking to their tax preparer to learn what the changes mean for them. ‘Why is my refund changing?’ Many will not think to ask the question of how will this impact their future refunds.” says Darren Liddell, Director of Program Innovation at The Financial Clinic. “Also, refunds won’t be issued while the government is shut down even though the government will still accept the returns.”

Credits claimed at tax time like the Earned Income Tax Credit (EITC) can make up 12% of some households’ yearly income and present a huge opportunity to get ahead financially, save some money for future goals like education and retirement, or pay down debt. Financially insecure families expect a properly functioning federal government to process their returns and issue their refund just like the IRS expects them to file on time. “We see the biggest rush for VITA services right at the beginning of tax season, so in late January, as many customers want to file as soon as they can,” according to Darren. Families looking to get on top of debt accumulated during the holiday season, make some headway on yearly savings goals, or make education/childcare payments for the semester will be relying on receiving their refund.

The financial pain inflicted on government employees, a looming shutdown of some housing and nutrition programs, and the disruption of the tax season are real consequences that will have a lasting impact on the lives of some of our most vulnerable friends and neighbors. The human impact should be considered with the knowledge that all of it is, in fact, needless, as the shutdown is the result of a manufactured, partisan crisis over a poorly conceived and racially charged plan for border security. We call on all representatives in Congress to fulfill one of the most basic tasks entrusted to them: provide the resources to deliver the critical services Americans everywhere rely on and reopen the government without delay.