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Even though I can never quite figure out why people want to do it, many people are expecting and excited to get a federal tax refund every year. As I have written before, in almost all cases, the money you get back from Uncle Sam is your very own money that you have overpaid. It’s money you are literally lending to the government at no interest and they are very happy to just return it to you when you file your tax return. First though, this year there is an extra monkey wrench in the picture you need to know about!
New Withholding Amounts for Your Paycheck
The Trump administration is pushing American businesses to withhold less in taxes from paychecks by February, aiming to quickly deliver the boost in take-home pay that Republicans promised their new tax law would bring. Sounds like a really good thing, right?
But the rush could expose millions of workers to the risk of underpaying taxes to the government now, which means they might owe more than they are expecting when they file tax returns next year in April 2019.
The IRS is urging employers to immediately change their tax withholding even though doing so will require them to use outdated 2017 forms as they figure out how much to set aside for tax payments. The old W-4s were tailored to measure tax payments under the old tax code which was rewritten in the new law.
The IRS plans to issue guidelines to companies and payroll processors on how to use the old forms to calculate tax payments under the new law. But there’s no simple switch-over calculation, and the uncertainty could mean workers may severely underpay or overpay their taxes by thousands of dollars in 2018 — something that will likely remain unknown until they file their tax returns next year.
The potential discrepancies are a side effect of the expedited overhaul that the Treasury Department and IRS are seeking to implement. They are prioritizing speed over accuracy as the Trump administration hopes that the tax cuts will bolster the economy and their political fortunes before the midterm elections.
The IRS could have required all working Americans to fill out new tax forms and provide information that would have allowed employers to more accurately decide how much to withhold. But that process could have taken months, likely delaying any benefit from the tax cuts until much later in 2018 and possibly affecting the 2018 midterm elections negatively rather than positively. With one government shutdown having already occurred and another potentially on the horizon, achieving a goal like bringing up to speed a new tax code will cause delays that weren’t anticipated.
What About Next Year?
If companies don’t withhold enough income tax, taxpayers could experience short-term euphoria when they receive larger paychecks, but then face a stunning tax bill in April 2019.
Similarly, if Americans underpay their taxes in February and March, the government could run up a huge budget deficit, creating a cash crunch at a time when lawmakers are under immense pressure to raise the debt ceiling.
This Year’s Tax Filing – 2017
If you’re due a refund right now, you’ll want to file your taxes as soon as possible. But, as of yet the IRS hasn’t yet even said when it expects to start the new tax season. Most people can’t really finalize their returns until they get all the tax forms they need from employers, financial institutions, and other sources of vital tax reporting information.
In addition, I also know that many of us are confused about the tax law changes that were signed into law last December, although almost everything you have read and heard about these laws will not have any effect on the tax documents and papers you will be filing for your 2017 taxes. That comes with next year’s 2018 tax filings.
Here are the important deadlines that apply to many popular tax forms in 2018 to help prepare your 2017 tax returns.
January 31: W-2s and most 1098 and 1099 forms
January 31 is the most important date for taxpayers, because that’s the day on which employers must issue W-2 forms to their employees. Form W-2 has your gross income, taxable income, and amount of federal and state income tax withheld from your paychecks during 2017, and so it’s instrumental in figuring how much of a refund you’ll get. W-2s also have information broken out on various tax breaks, including 401(k) contributions, employer-provided health insurance, flex plans, and more. Be sure to check with your employer if you don’t get a W-2 by the end of January. If you’re an independent contractor rather than an employee, you can also expect to get 1099-MISC forms by January 31.
Also, you’ll get most of the forms you need from financial institutions like banks and brokerage companies by the end of January. This includes interest income reporting on Form 1099-INT, dividends on Form 1099-DIV, retirement plan distributions on Form 1099-R, among others. In addition, Form 1098, which includes mortgage interest and other mortgage servicing information, is also due by January 31.
Keep in mind that most documents come via the mail so there could be a delay.
February 15: Some 1099 forms
A few 1099 information returns take a little longer for financial institutions to produce, and the IRS acknowledges that by setting later deadlines for sending out those tax forms. For instance, Form 1099-B reports sales of investments over the course of the year, with breakdowns provided according to holding period that provide vital tax basis information for use in determining capital gains and losses. Brokers must provide 1099-Bs by mid-February. Similar rules apply to real estate sales information on Form 1099-S, as well as certain 1099-MISC forms for cases not involving nonemployee compensation.
March 15: Most Schedule K-1s
Those who are involved in a partnership, limited liability companies, or other association that elects to be taxed as a partnership typically get information reporting on Schedule K-1. This includes not only professionals doing business using one of these entities, but also investors who own equity units of a master limited partnership or similar investment vehicle. If the entity that you own an interest in qualifies as an electing large partnership, you must get your copy of Schedule K-1 by mid-March.
April 15: Other K-1s
If you have an interest in a partnership or similar entity that doesn’t elect treatment as a large partnership, then the deadline for K-1s to get to you is April 15. That obviously doesn’t give you any time to prepare your actual return in a timely manner, so those taxpayers who fall into this category routinely have to make their best guess and then file an extension before filing their final tax return.
April 17: Federal Tax Day
While your federal taxes are usually due to the IRS on April 15, this year that falls on a Sunday. Also, April 16 is Emancipation Day in DC, so Tax Day will fall on April 17 this year. However, there’s no reason to wait until the last minute to file your taxes. In fact, I try to file as early as possible for a couple of reasons. First, it helps prevent tax identity theft. Second, I get my (small) refund sooner. This is also why I use TaxAct to file my taxes. It’s quick, easy to use, and accurate. Plus it’s free to file Form 1040EZ or 1040A.
Form arrives late? Here’s what to do
If you don’t receive a form by the deadlines above, get in touch with the employer or financial institution that was responsible for getting it to you. You should expect prompt action in response, as these institutions have legal responsibilities to report in a timely manner and can owe penalties to the IRS if they don’t.
The biggest mistake you can make is not to report income that you know about just because you didn’t get a tax form reflecting the amount you received. More often than not, the IRS has other ways of determining the income you received, and leaving it off can trigger red flags that will lead to an audit.
Knowing when to expect your tax forms can give you a better sense of when you’ll be able to file, and therefore when to expect your refund. Keep in mind, a refund isn’t the best way to gain control of your finances. If you had that money in your paycheck, you could use that money in many different ways to make more or save for your future.
Are you preparing for this tax season and are you ready to make decisions that will affect next year’s tax return, too? Are you confused about the tax law changes and how they will affect you?