Don’t depend on this refund simply but. The April tax season can come as a giant shock

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If you are expecting a tax refund, you could be very disappointed this filing season.

A new W-4 shape and a pandemic-dominated 2020 year could result in millions of Americans receiving smaller refunds or even owing money to the government that year.

“I’ve seen people get upset that they owe money or that they weren’t getting as much back this year as they expected,” said Adam Markowitz, registered agent at Howard L. Markowitz, PA CPA in Leesburg, Florida.

He assumes that disappointed customers will bear much of the blame.

“I fear this tax season,” he said.

Two main factors could detract from the spring refund euphoria. The first is the new W-4 form, introduced under the Tax Reduction and Jobs Act, which regulates withholding paychecks for employees. After a one-year implementation delay in 2019, the major changes in the new form took full effect last year and could be a shock to many taxpayers.

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“I hate this new shape mainly because it’s not the old shape,” said Nayo Carter-Gray, founder of the accounting and tax preparation firm 1st Step Accounting in Towson, Maryland. “It confused a lot of people.”

The new W-4 form should minimize refunds and withholdings should more accurately reflect people’s ultimate tax liabilities. In other words, many taxpayers took home slightly larger paychecks last year at the expense of refunds this spring.

This is a laudable goal in theory, since refunds are essentially interest-free loans to the government. However, Markowitz believes that many people don’t appreciate the higher pay to take away and then will really miss out on the April refund.

“Withholding tax is like a savings vehicle for many people – especially lower-income taxpayers,” he said. “We’re going to do a lot of triage to explain why people are in this situation.”

Unemployment checks are not tax-exempt

The second big point that might surprise people is the unemployment benefits they may have received. While the payments for coronavirus stimuli were tax-free, the increased unemployment benefits were not.

“Employees who have been made redundant or have been on leave and are receiving unemployment benefits face the biggest problems,” said Carter-Gray.

Labor Department figures showed that 13.4 million people were receiving unemployment benefits last September, and the numbers stayed high throughout the year. Withholding tax on unemployment benefits is voluntary at the state and federal levels, and many states withhold very little or no tax by default.

“People who had never received unemployment benefits before did so last year and in many cases there were no or insufficient withholding tax payments,” said Markowitz.

This means that many taxpayers are now liable for taxes on these benefits. It could gobble up most of the refund they would otherwise have expected, and when combined with smaller withholdings under the new W-4 form, more people may need to send checks to Uncle Sam in April. Markowitz expects to help his lower-income customers find ways to do this.

“I sit down with my youngest customers because this will be a problem and a shock for many of them,” he said. “It’s going to be a real battle for taxpayers and tax advisors this year.”

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