Got a Case of IRS Tax Shock?

It didn’t take long after people started filing their taxes this year before the outcry began. “My refund is what now?” “We owe how much money?”

The accounting landscape tilted when the new federal tax law took effect last year and now early filers are starting to see the results, said Sam Handwerger, a practicing accountant and lecturer in the accounting department of the Robert H. Smith School of Business.

The causes of taxpayers’ heartburn, he said, are likely two areas: the amount withheld from each paycheck for the year’s total tax liability and a new cap on the deduction for state, local and property taxes.

For those who are getting a smaller refund than anticipated, their new, lower tax rate translated into lower withholding; so instead of getting a single big chunk of money after filing, it was incrementally spread throughout the whole year.

“They got what they were expecting,” Handwerger said. “But it was over the course of time, incrementally added to each paycheck since the withholding was lower based on the revised tax withholding tables.”

From a tax professional’s standpoint, this is the preferred outcome. Getting any refund means that you basically gave the federal government a loan instead of already having those dollars to save or spend, he said.

“People like getting a big check at the end of the year, sort of a forced savings vehicle,” Handwerger said. “It’s hard to break someone’s habit. And past statistics show that big ticket purchases of consumer products occur often during the tax filing season.”

For filers who find themselves owing more than expected, the culprit is probably a new $10,000 cap for the deduction of state, local and property taxes, so anything spent above that will no longer simultaneously decrease federal liability. While that change will hit residents of states like New York and California hardest, Maryland “is not far behind,” Handwerger said.

“They are having a little bit of a shock,” he said. “I think that Marylanders are certainly hurt.”