Did You Get a Smaller Tax Refund This Year? Here’s Why.

Tax filing season is in full swing and we are finding that people are feeling, well, a little cheated. When Trump passed the Tax Cuts and Jobs Act back in December of 2017, we all expected to pay less in taxes. But, the majority of people are finding they are getting smaller than normal tax returns – so what’s the deal?

The reality is, about 80% of tax fliers did receive a tax cut.

Let’s compare 2017 (last year’s tax filing rates) with what we are currently experiencing in 2018 and will continue to see through 2025.

IRS Tax Brackets – 2017 & IRS Tax Brackets – 2018

That chart is super confusing so let’s break it down with a real-life example. Let’s say John and Jane are married, filing jointly, with a household income is $90,000.

Together, J&J paid $13,977.10 in taxes in 2017:

• ($18,650 x 0.10) + ($57,249 x 0.15) + ($14,099 x 0.25) = $13,977.10

Now, J&J will pay $11,679 in taxes in 2018:

• ($19,050 x 0.10) + ($58,350 x 0.12) + ($12,600 x 0.22) = $11,679

Meaning, with this tax reform their household will save $2,298.10 in taxes if they make $90,000 both years.

Not only that, but there was a dramatic increase in the Standard Deductions.

Filing Status 2017 Standard Deductions 2018 Standard Deductions

Single $6,350 $12,000

Married Filing Jointly $12,700. $24,000

Married Filing Separately $6,350 $12,000

Head of Household. $9,350 $18,000

These are the biggest changes for sure, but a lot more went into this tax reform. To take a look at the full details you can read the bill that passed here.

If there are all these new tax breaks – why am I getting less back in taxes?!

Great questions. The problem is, most of us have a “set it and forget it” mentality around taxes. Unless you own a business and have to budget out taxes and pay quarterly, you likely fill out a W-4 when you start a new job – then never think about taxes again until tax filing season. Most of us know but don’t think about the fact that you pay into taxes all year long in a payroll deduction to chip away at the total amount you owe in taxes. The amount withheld by your employer is based on a Withholding Table provided by the IRS in coordination with your W-4 designations.

The tax reform also brought on changes to the Withholding Tables. This change was very exciting at the time because less taxes were being withheld from paychecks and people were getting more money in their bank accounts. This is why we are seeing smaller tax returns even though the majority of people are paying less over all in taxes.

Let’s go back to John and Jane our married couple, filing jointly, who make $90,000 a year and both get paid bi-weekly.

Let’s say they paid $615 collectively in taxes per pay period in 2017. They would have paid $15,990 towards what they owed in taxes by the end of the year. When they filed their tax return, the amount they paid was reconciled against the money they owed, $13,977.10. Because they overpaid their taxes during the year J&J received a $2,012.90 tax return – and they were probably excited about it.

In 2018 this same couple, because of the change in the Tax Withholding Tables, only paid $423 collectively in taxes per pay period. At the beginning of the year J&J were very excited because they saw $192 per pay period, $384 per month, back in their bank account which is a significant amount. Like most people, J&J stopped noticing the increase as the year went by and adjusted their lifestyle to the extra money. Now, when they file their tax return, the amount they paid, $10,998 is reconciled against the money they owe, $11,679 and they discover they owe $681 to the IRS.

It’s likely that the tax reform meant your household paid less taxes over all, but you didn’t pay as aggressively towards what you owe for the year in each pay check due to the changes in the Tax Withholding Table. Leaving you feeling like you got shorted on your taxes because your tax return is smaller, non-existent or worse, you owe money when you never did in the past. If this happened to you, you certainly aren’t alone. This is something to keep in mind into the future as this current bill is in effect until 2025.

If you are overwhelmed and confused by any aspect of this change, we can help. Contact our office at 603-432-8291 or make an appointment right online at http://tslnh.com/schedule-an-appointment/.

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