So, were the tax cuts good or bad for you?
Tax refunds feel like free money, a windfall.
A check appears a few weeks after you file your taxes, and you don’t remember having to do anything painful – like working – to earn it.
But that’s not true. It’s just money you overpaid to Uncle Sam, and that is now being returned to you.
If you did get a refund last year, you were one of over 100 million Americans who did.
But this year, the talk at the office water cooler is that far fewer people will get refunds and, in any case, they will be smaller. (In 2018, refunds averaged a little less than $3,000 each.)
So, what’s the truth? What is the story behind the disappearing tax refunds?
Changes in the world of taxes
This spring is the first time U.S. taxpayers are filing their tax returns with the full effect of President Trump’s Tax Cuts and Jobs Act that passed in late 2017.
The law’s much-touted “lower individual income tax rates” meant many Americans took home more money each pay period. That was the upside.
However, several other changes could have had either a positive or negative impact on the taxes due from each individual, depending on circumstances.
In summary, the standard deduction nearly doubled to $12,000 for singles and $24,000 for married filing jointly. As a result, around 90 percent of filers will take the standard deduction this year, and no longer itemize.
But personal exemptions were eliminated, and some itemized deductions were lost or capped.
The government giveth and the government taketh away
Some favorite deductions that were lost include unreimbursed expenses related to a job (like home office costs and mileage), tax preparer fees and investment expenses.
Theft and property damage that isn’t reimbursed by insurance is now deductible only if attributable to a disaster declared by the president.
Home mortgage interest can only be written off on up to $750,000 of qualified debt, down from $1 million. Also, interest on home equity loans and lines of credit is only deductible if spent on the primary or second home, and no longer for any personal expenses.
One of the most damaging changes relates to property tax, real estate taxes and state and local taxes (SALT). For those who live in high-tax states, those taxes could be written off in their entirety before. Now there is a $10,000 cap. (The Tax Policy Center says the average deduction for New Yorkers in 2015 was $22,000, so it represents a big hit for some.)
On the positive side, the threshold for out-of-pocket health-care costs is at 7.5 percent of adjusted gross income in 2018 but will revert to 10 percent in 2019.
Charitable contributions can still be deducted. However, fewer people are itemizing deductions for 2018, so donations will have to be significant enough to justify itemizing.
What do the tax refunds look like?
In mid-February, average tax refunds ran $2,640 according to the IRS, 16 percent lower than the year before. (Those numbers are what got tongues wagging.) But a week later, they averaged $3,143, or higher than the year before.
It is not clear whether refunds will be up or down for the whole year, compared with the past.
And it doesn’t really matter.
Because what no one talks about is that when the new tax bill went into effect, at the same time the IRS and Treasury adjusted the tax withholding tables. Those tables are what your employer uses to determine how much to deduct as withholding tax from your paycheck.
More of your money may have been paid out to you each paycheck. So, instead of you making an interest-free loan to the U.S. government each week by having the IRS over-withhold, and getting the extra funds back as a refund when you file, you may have been receiving more of your money all along.
You probably also never thought to adjust your withholding to reflect the loss of a significant deduction or a troublesome cap such as the one on the SALT deduction.
In fact, this year many people were flying a little blind.
What if you want a big refund, no matter what?
Some people look at their tax refund as a forced savings account. It’s a way to:
- replenish an emergency fund,
- pay for a vacation,
- pay down debt,
- open or boost contributions to a 401(k),
- put money into a health savings account (HSA),
- fund a 529 college savings plan, or
- fulfill a dream home improvement project.
Whatever the reason, if it’s important to you to receive a lump sum of money each year, your first step should be to adjust your tax withholding rate at work by submitting a new Form W-4.
It won’t change the outcome for 2018, but adjusting your withholding rate will let your 2019 refund start to grow.
And if you aren’t happy with the overall results for the tax year 2018, now you know how the Tax Cuts and Jobs Act affected you. By working with your financial planner to develop a strategy for future years, you will be able to get the most out of your hard-earned money.
So, were the tax cuts good or bad for you?
Ultimately this is what you want to know.
And the size of your refund won’t tell you.
Instead, you need four numbers: your gross income (before any adjustments or deductions) and the total tax liability (after all adjustments and deductions) for 2017 and 2018.
For each year, divide the total tax liability by your gross income. That will give you the percentage of your gross income that you had to pay in taxes that year.
Once you’ve done it for both years, in which year was the percentage lower?