In a world where seemingly everything these days is being politicized, it’s only natural that we’re starting to hear angst regarding tax returns. After all, this filing period is the first where the Tax Cuts and Jobs Act (TCJA) is playing a role, after having been signed into law by the President before Christmas of 2017. Many are decrying the smaller refund that they’ve been receiving and chalking tax reform up as nothing more than a middle class tax hike that benefits the wealthy (if you recall, the TCJA also cut corporate tax rates by 14 percent).
However, this line of thinking is misleading, and it’s important for people to look at the full picture here.
Yes, it’s true that during the early filing period so far the average tax refund is down about 8.5 percent from $2,035 to $1,865. But don’t mistake this for the TCJA pulling the wool over the eyes of Americans. In some ways, it’s actually a good thing that refunds are a bit less.
More Money in Paychecks
The big GOP promise when the TCJA was passed is that it would pump more money into the paychecks of working Americans. And it has. How much more money an American worker received is obviously based on their income and federal tax withholdings, but the vast majority of workers did see an uptick in their paychecks. This, in turn, has led to more under-withholding and less over-withholding based on the new tax tables that were created. That means that many Americans are seeing their “tax refunds” in real-time with each paycheck rather than in the form of a lump sum at the end of the year, especially as it pertains to the middle class.
In many ways, this is a positive — as any refund you’re owed by the IRS is essentially an interest-free loan you’ve just given the government. Financial experts, in fact, say that every American worker should be looking to break as close to even as possible when it comes tax time. Yes, this will ensure that you’re not necessarily getting a refund (or having to pay excess taxes), but it will ensure that you’re maximizing your earnings potential year-round instead of banking on one lump sum to make up for it when you file.
So yes, while many may bemoan the fact that their tax returns are less than what they were before, just ask them if their paychecks went up. If they respond with a “yes,” then you know where their refund money went. It went to work for them as they received it in their paycheck, not while getting a refund during the filing period.
Still Want a Hefty Refund?
While the experts say you should come as close to breaking even on your taxes each filing year, we get that everyone is different. Some workers enjoy a refund they can dedicate to a home improvement or other larger purchase. Others like a refund for savings purposes, worrying that they’ll spend any excess that’s in their paychecks from adjusting withholdings.
If you prefer a refund and don’t mind giving the government an interest-free loan, there are still some ways you can ensure you’re getting a hefty one. The first is to contact your company’s HR department and adjust your withholdings. The fewer amount of dependents you claim, the more taxes the government will take out of your paycheck. So if you’re at a 2, for example, going down to a 1 or even a 0 will ensure that taxes are being over-withheld from your pay. You’ll recoup all of this when you go to file. You can also ensure you’re making enough donations or charitable contributions to get over the standard deductions.
Obviously there are other intangibles that can impact tax returns, like the cap that the TCJA puts on mortgage interest, for example. But for middle class workers, the benefits are there. It’s just a matter of understanding why the refund is lower. And as we noted, it’s not because you’re making any less money.
Regards,
Ethan Warrick
Editor
Wealth Authority
