The history — and psychology — behind the tax refund
There has been a great deal of talk about the TCJA and it's impact on various tax filers, but the one complaint we read over and over is that of those receiving a smaller refund for 2018. This article gets to the bottom of this concern and steps through the history and psychology of it. A good read.
S E E D E D C O N T E N T
As McAuliffe is constantly telling his clients, and anyone else who’ll listen: a refund is just money you overpaid in taxes. It is an interest-free loan to the government — one you can avoid by changing the amount your employer withholds from your paycheck.
But for the multibillion-dollar tax preparation industry, the tax refund is a selling point.
“We're letting our clients walk away thinking that we're great because of the refund we get them,” McAuliffe said. “It's bull. It's garbage.”
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This has been touched on in other articles, but we see so much false information about it, I thought I'd throw in some clarity. Your thoughts?
People are funny. We do such nutty things ... all the time. We seem to rely too heavily on blind faith, simplifying assumptions and snap judgments. I suppose that is understandable, thinking things through takes time and effort.
It seems the smart thing to do is to underpay your taxes every week then pay the difference at tax time, that way you can bank the money and gain interest. The problem is most people would get in trouble that way, they wouldn't have the money in the bank because they spent it. People like to overpay a little because it gives them what seems like a bonus check instead of a Bill. I think it works well for most people who already have enough money stress, and given the paltry interest rates the banks are paying it's worth every dime lost to have peace of mind that you'll be getting a Check instead of writing one.
I'm not saying a word. I like my refund and that's that
Auto dealerships love those refunds too.
Most people don't save anymore and haven't since the last recession.
With Savings accounts and CD rates at 1%, who cares.
The same people who aren't enthused by 1% interest rates at their own savings bank
aren't going to care about losing 1% to the US Treasury
if it means losing that vacation "nest egg" or car down payment that they can depend on.
It can be hard to save when you live paycheck to paycheck. I could put more of my paycheck into my savings account, but as you pointed out, 1% is not a very good incentive. Let's say I put back $1200 a year, a 1% return is only $12. Whoopty doo! And all that interest has to be claimed in next year's taxes.
I save but I do it through investing in a combination of mutual and exchange traded funds of money markets, bonds, and stocks well diversified.
I. Don't. Care.
Oh I like it too, for sure. My income, however, is quite variable, and is based on a percentage of a billable hour. Sometimes I have lots of billable hours, other times not so much. I typically start the year figuring a certain percentage for Fed withholding and another for State (loosely based on W-4 withholding guidelines, but mostly based on experience). What I do then is adjust my withholding percentages 2 or 3 times a year based on quick projections that I do, and/or to assist with covering any unexpected major expenses that come my way during the year. I usually shoot to minimize any refund at the end of the year. For 2018 however, due to new lower tax rates and other aspects of the TCJA I still ended up with a 5 figure refund because I failed to properly project my taxes and adjust my withholding earlier in the year based on the 2018 law. Got lazy and didn't pay enough attention. So now I have learned what to do for 2019 and have already made the first withholding adjustment.
There is a bit of an art to it, but I try to do the projections without the assistance of my CPA whose fees would exceed any interest I could possible make on the excess taxes withheld over the course of the year were I to have held on to those funds. My CPA seems to get a kick out of reminding me each year that if I could take a tax holiday for just 2 years I could completely pay off all three of my kid's student loans. Wouldn't that be nice?
tax holiday? You bet.
My kid is paying off her own student loans. lol
If I had a variable salary, I would probably do what you do
Something we can agree on.
I don't really care about the minor amount of interest I lose by having a refund on federal every year. I loath paying taxes out at the end of the year. For some reason I always get money back from Federal, and owe the state about less than $100.
I have adjusted my with holdings on the state taxes; but seems corporate accounting in Memphis doesn't match Michigan taxes well.
People got dependent on receiving an economic bump every year. Trump capitalized on this by quietly tinkering with the withholding rules when he overhauled the tax code, in an attempt to get people to notice the bump in their paycheck. The problem is that this caused the bump to only go from tiny to barely noticeable. Ignorant or not, people who failed to stay on top of how this POTUS was manipulating them got a rude awakening, and that will erode the base.
Wow! "economic bump" ??? Did you happen to read the seeded article?
Let me ask you this; Who do you trust more with your own money, yourself or the bureaucrats in Government?
I should hope your answer would be yourself. If not, then becoming "dependent" in the sort of way you just described will consume all of us. It is unsustainable.
Let me ask you this; Who do you trust more with your own money, yourself or the bureaucrats in Government?
Wtf are you talking about? I’m just describing the masses and how they’ve become accustomed to taxation. I didn’t say shit about what’s right and wrong, I just pointed out that this administration did a piss poor job of reading the citizens.
However, I would add that it is a pretty stupid argument that someone should adjust their withholdings to receive as close to nothing for a refund as possible, and then take that extra one thousand dollars or whatever and put it in an interest bearing CD (where they have to wait to access it), just to eventually end up with an extra 50 bucks. It’s 50 bucks for fuck sakes. That’s a meal for two at Texas Roadhouse, or a meal for the family at Boston Market. It’s too trivial to judge someone over. People like their refunds, regardless of whether there’s a different way to manage their money that will eek out a few extra bucks if you’re diligent, patient, and educated on the subject. This administration did not consider that reality, and they will feel it come election time.
Fair enough. Sorry I took it beyond that.
So you don't think that most citizens (especially those who may have voted Big Orange) liked the idea of lower taxes and consequently lower withholding? Or are you saying that perhaps those citizens just didn't realize that more money in their pocket each month might mean a smaller refund at the end of the year?
I don't like the same old tired attempt at currying favor by lowering taxes ( which we are all supposed to go out and stimulate the economy with )
while the richest CEOs and corporations use loopholes to pay as little as possible, like Amazon,
while kicking the National Debt can down the proverbial road so our descendants will have to figure out how to pay off the 22 plus Trillion in debt.
Plus a border wall, plus a refurbished military, plus the Space Farce, plus a new arms race with Russia and China.
Too much?
So you don't think that most citizens (especially those who may have voted Big Orange) liked the idea of lower taxes and consequently lower withholding?
I’m saying that this administration tried to make the tax cut feel bigger in the short run by forcing employers to withhold less, and didn’t consider how the tax payers were going to feel about getting a tax bill or tiny return when they were accustomed to getting a decent refund. It was a stupid move, and now they’re basically countering the backlash by telling everyone they were stupid for not inserting themselves into the changes by telling their employers to undo what the IRS instructed them to do regarding withholding. Great plan! Call your constituents ignorant. It has really helped solidify the notion that Trump will stoop to any level, and that he is the worst leader in this nation’s history.
I think that is Hal's point. He is probably correct for many people.
It is a bit ironic that Trump (who relies on voter ignorance, naiveté, emotion, ...) would have the effect of his tax cut lessened by these qualities. I think it probably is the case that many people noticed the bigger paychecks, acknowledged the tax cut and then took it for granted. Now when they see less of a refund, many of these folks will cry WTF!! without realizing their tax refund was provided throughout the year.
Sometimes we must shake our heads, smile and move on.
Well, I certainly wasn't paying attention. When I got my "bigger" paycheck, it was a whopping 35 dollars more. That was 70 bucks a month, which won't even buy a carton of smokes. THEN we get our 1040s back from our "guy" and our refund is significantly lower than in earlier years. I figure I lost right around 1500 bucks from trmp's "tax cuts".
There you go ... $35 per paycheck is too small to make people happy. But $840 refund at the end of the year would be large enough.
And you are not even a Trump supporter.
If I had been getting only $840 dollars, then yeah...but we were getting way more than that
A good point to raise with our friend Freewill since he has done plenty of research into the current rules.
Not sure about plenty, but certainly quite a bit. In reading the comments above, I think it would be instructive for those who feel they are being ripped off because of a smaller refund to forget about the refund and compare instead what they paid in taxes in 2018 vs. 2017 if their income and other circumstance were closely matched. For those whose incomes or circumstances may have changed significantly in 2018 there are tools available to compare what their tax burden would have been had the 2017 rules remained in place. Some sample calculators HERE , HERE , and HERE . You can use these to see the differences in what you actually pay in taxes, either in raw numbers or as a percentage of income (i.e. effective tax rate).
My CPA runs me a side by side comparison and although I made a little less than I did in 2017 and my adjusted gross income was a little lower, my tax burden dropped by a larger margin. My effective federal tax rate dropped 3.2% compared to 2017. So even though I live in California, the new 2018 tax law saved me a considerable sum of money over the course of the year compared to what I would have paid under the 2017 Code.
That is not to say that everyone will see the same result, but comparing refund sizes will certainly not render the truth in the matter. The truth is that most people will enjoy a lower Federal tax burden and lower effective tax rate based on the 2018 Code vs. previous the Code. Those who won't are the more well-to-do real estate owners in high-tax states like California or NY who will not be able to garner the heavy deductions they once enjoyed.
I suppose what I am trying to say is that refunds and withholding are irrelevant, regardless of how people feel about them or why, when looking at whether or not one benefited from the TCJA in its final incarnation compared to previous Code. Simply throwing up one's hands over a lower refund and/or insisting that the IRS lowering of the W-4 withholding percentages was simply a Trump Administration ploy, is not doing the due diligence in my opinion.
Having said that, there are other ramifications of the TCJA as well that were not particularly good for small businesses like mine, and I wrote about that HERE too. So it is certainly a mixed bag, good for some, not so good for others, but one needs to research the stories closely to get to the truth.
Simply throwing up one's hands over a lower refund and/or insisting that the IRS lowering of the W-4 withholding percentages was simply a Trump Administration ploy, is not doing the due diligence in my opinion.
If it wasn’t a ploy, then why did hardly anyone understand that the overall effect was going to be a substantial degradation in the refund aspect, in many cases even a reversal? If the POTUS is going to tout the tax cut to the extreme he did, why not explain the whole story up front? Because it was a ploy. Many of those who weren’t researching it on their own got burned with a tax bill when they were expecting a refund. In my wife’s case it amounted to a five thousand dollar tax bill instead of a return. She can’t stand him to begin with, but I imagine anyone in her shoes that was a Trump supporter, is having buyers remorse in a big way.
The overall effect is a lower tax burden and a lower effective tax rate under the TCJA for most taxpayers vs. the 2017 Code.
That is the bottom line. Other than perhaps the 5% whose burden went up (mostly high-income earners in high tax states), honestly who should be upset or be having buyers remorse?
Nope. Not enough. Especially the kicking the can on the debt issue part. But you know as well as I do (judging from your last sentence) that spending policy is at the root of the debt problem both at the individual level as well as the macro level. The government is doing a great job teaching people how to live beyond their means, and pass the results on to their progeny IMHO.
I would have to disagree with that. The people whose tax burden went up are those who live in areas that have high property taxes due to the local school taxes. That would be basically the whole NE and Cali. Between that and the Fed raising the rate on lending, the net effect has been a crash in the housing market and a huge increase in our tax burden.
As for the refund part of this, while I agree that the IRS need not hold people's money, the truth of human nature is that the refund was a forced saving. People would either use the money to pay off credit cards or buy a big ticket item. And if you consider that at best your savings account is making about 1.75% (money markets slightly higher if you put it in for a year), most people would rather have the refund, then a few dollars more per paycheck.
(footnote: if the banks were paying more for savings, I would agree with you 100%.)
btw.. I grew up in Wantagh, just one town away from the CPA discussing this topic. I find it interesting that he's OK with the cap on property taxes ( apparently).
The people whose taxes went up are well off. It's basically impossible for someone whose household income is not in the upper 15% or who doesn't live in a multi million dollar house to have their taxes go up.
Sean,
You have no idea what you are talking about. Long Island is full of working and middle-class people who now are struggling to pay their taxes due to the $10,000 cap.
Here is a house in Levittown, which is a blue collar neighborhood.
3 bedrooms/ 2 baths has taxes over 13,300. Those people now have to find the money to pay that extra 3,000 in taxes. Hardly people living in a rich neighborhood.
This is all over Long Island. We are gagging on this cap.
These people live hand to mouth as it is. This was punitive to the NE and we all know why.
This is our school taxes that we are talking about. Do you have any idea of how many times we vote down our taxes and go on austerity budgets? Of course, you don't. BTW Austin is getting up there with school taxes. I'll pontificate to you when you feel the pinch.
Oh wait, what am I saying? You pay next to nothing for your homes. That is why your taxes are so much lower. Your actual rate is pretty close to ours. Texas is the 4th highest in the nation. So you can get a beautiful 4 bedroom house for about $175K. That does not exist in metro NY, not even in Levittown.
I updated my comment. No swing and a miss. I have checked out what a house in Austin suburb costs and it's about $250K and that is a ton for Texas. Even at your current tax rate you are paying nothing in taxes.
The bus driver in Levittown is making about 60K and has to now cough up an extra 3K in taxes to pay for a modest house with this new tax rate. How is that for the middle class?
We are complaining about our school taxes. I know I live here. The cap is killing our middle and working class. What we pay to the state is a fraction of what we pay in school taxes.
And the worst part of having this discussion with you, is you KNOW THAT.
The cap was meant to be punitive and it is.
https://www.ashtonwoods.com/austin/summit-lake-travis?utm_source=zillow&utm_medium=display&utm_campaign=austin_zillow_summitlaketravis-interior-onsite
A beautiful new home in Austin for the same price as a small modest home in Levittown.
That took me 2 min to look up.
If I looked up Waco I'd find one for much less.
And I clearly said that. I also said that renting is like leasing. You are paying less to get more. That is why people lease cars.. remember I said that, too.
And on Long Island, there is no rent control. My parents get market rate for the area. My parents have sold their underperforming apartments and then they have to purchase quickly so that they don't get hit with capital gains.
Metro Austin is a big place. I purposely picked a new build in a good area as a comparison to the house in Levittown. The Austin house blows the Levittown house out of the water and is in the metro Austin area.
Now if I got out east on Long Island, where people are generally not commuting to Manhattan, then you get a comp more like Waco, right? Should I bring up some of those homes?
You know the answer to this.
The top of the middle class income household income is $117,00. Given the rate cuts and increase in the standard deduction, it's mathematically impossible for a household making that to see a tax increase, unless they are living in a multi-million dollar house with massive property taxes.... Numbers don't lie.
People want to tax the wealthy, and if these changes have a significant impact on your taxes, you are wealthy.
Your tenants are paying a fraction of your taxes each. They would be paying a lot more if they outright owned a home. That is why people rent.
Sean, you obviously don't get it or don't want to get it.
Other than perhaps the 5% whose burden went up (mostly high-income earners in high tax states), honestly who should be upset or be having buyers remorse?
Those who were expecting a refund! Hello? That’s the point of my comment. Yeah, they didn’t do their homework. That doesn’t change the fact that they were misled from the beginning. It was a nasty surprise that served to only further elucidate what kind of person the POTUS is.
The numbers are what the numbers are Perrie. A family (2 adults, 2 kids) at the top of the middle income range living in that half million dollar Levittown house will see a tax decrease.
Frankly, I don't think you are going to get a lot of sympathy for the plight of those in half million dollar homes. It's not really fair the rest of the country lets them shirk their federal obligations so they can spend more money locally.
Average Home Values By City
Beg to differ Perrie but they do NOT have to pay an extra $3,300 in taxes, they simply can't deduct that amount on their federal income tax return, so worst case they pay an extra amount equal to their effective Fed tax rate times the $3,300. The average effective tax rate for most middle income Americans based on the TCJA will be in the 18-20% range (other than those with high income whose rate will be higher, or very low income whose effective rates will be far lower or even negative). So $660 is the worst case additional federal income tax burden if that were the only aspect of the TCJA that is considered.
However, in many cases the doubling of the standard deduction to $12,000 for single filers, $18,000 for HoH, and $24,000 for married filing jointly will partially or even completely erase that additional burden resulting from the capping of the state taxes deduction at $10,000, and still result in a lower federal income tax burden for the filer than would have the 2017 Code.
From what I have read so far, I'm afraid Sean is correct about who most of those are who might see a higher tax burden in 2018, but I am willing to look at the numbers once the 2018 tax season has concluded and the records are in on who paid lower federal income taxes, or had a lower effective federal income tax rate, than they would have under the 2017 code.
I'm afraid the $13,300 property tax bill itself is the real problem Perrie, and that is not a Federal issue. That figure certainly sounds more "punitive" across the board than the capping of a deduction that in most (but certainly not all) cases favors high-income property owners.
How the hell do you know how many were expecting a refund, or how many didn't do their homework? Or maybe they were upset about it until they learned they still enjoyed a lower tax burden and lower effective tax rate? Seems to me that only those who are complaining about the TCJA or how it was a Trump "ploy" are in the "upset because I didn't do my homework" camp.
How were they misled Hal? They were told their tax burden would go down and they would see a lower effective tax rate than the 2017 Code, and for all but 5% of mostly higher-income filers, that was true based on info we have so far. They paid less in Fed Income taxes and had more money in their pocket to use as they saw fit. I think you might be grasping at straws over the number of people you think are going to be upset over this.
But as I mentioned to Perrie, let's wait until the 2018 tax season has concluded and then look at the numbers and see who enjoyed a lower tax burden and who did not based on the TCJA vs. the 2017 Code..
You’re not getting this. It’s a simple concept, but apparently beyond you.
OK let me explain this to you.
People living in Levittown bought their homes when they were no more than $150K, so they could afford them.
It is not what they paid for the homes, but the present home values based that our property taxes paid for schools based on that is the problem.
Hi Freewill,
The additional property taxes, by old standards, would have been deducted for adjusted income not from and that means your adjusted income is higher by $3,300.
The new tax code is punitive to those who have to pay high school taxes.
And most of Nassau County is not rich, yet we pay the highest taxes in the nation.
The power has gone out here and I am on backup.. so I will try to finish this tomorrow.
You're right. Conjecture lacking basis in fact or reality are indeed beyond me.
I'm sorry Perrie, I don't quite follow your point. Are you saying that property tax deductions have historically been treated as an above-the-line adjustment to Federal Income, resulting in a lower AGI? I'm afraid that this is not true. State and local taxes have always been and still are itemized (below-the-line) deductions used to lower taxable income as long as they exceed the standard deduction. In rare cases, if one has a small business, one may qualify to deduct a portion of one's real estate tax as a business expense which can then be used as an above-the-line adjustment to one's income. But that applies mostly to the self-employed working at least part time from home, a very small percentage of filers, particularly in blue collar areas.
So in your example limiting the deduction to $10,000 one would pay taxes on that additional $3,300 of taxable income, not pay the whole $3,300. That was my point. Not to mention the fact that many in this predicament might indeed be better off claiming the now much higher standard deduction offered under the TCJA, rather than itemizing, therefore rendering the cap a moot point.
Understood, but I suppose my questions would be, why is that, and isn't that an issue that needs to be addressed locally and not at the Federal level?
are = is
I live in California and I’m strongly in favor of the cap on mortgage interest and SALT. That was the best part of the whole reform.
Okay, so the house they bought appreciated from $150,000 to $500,000. So the argument is they deserve tax breaks, so they can enjoy the benefits of a small mortgage, huge investment returns, and expensive local services? They need help since they acquired too much wealth?
I get those property taxes are out of control. But the solution is to handle that locally. The solution is not to allow some to have their local taxes subsidized by those in more fiscally restrained localities. SALT incentives high local taxes and helped create a distorted real estate market.
You are correct, that property taxes were itemized. They still had a direct effect on adjusted gross income.
Here is 2017's 1040:
and here is the itemized deductions:
Do you not deduct itemized deductions from the total from page 1? Does that not directly reduce the amount that you will be taxed? The thing is, you had a choice. You could take the itemized deductions ( more than half of Long Islanders do) or you could take the standard deduction. Most Long Islanders took the itemized deductions because most of Long Island has 2 working people because they otherwise would not be able to live here, and thus make over the $156,900 limit.
Newsday is the Long Island Newspaper.
Unlike California, we don't have the state allotting money to our schools. We chose the town we live in by the quality of the schools. The majority of Long Island schools are among the best schools in the nation. One of the ways we would defray that was our taxes and now, that has been capped. So basically we are being punished for wanting great schools. You might view this as a local tax issue, but we don't.
So here is my issue. Capping our taxes is punitive to people living in a specific location. Otherwise, why did no other president do this? This all could have been addressed with the tax brackets. Also, the people in who make over $250K and over get the biggest tax break.
So while people like Sean are talking about Long Islanders being rich (we are not) the actual rich still benefit, even in NY, while our blue collar an middle class suffers.
I didn't fail to note that. I just didn't see the relevance. The reason I took Levittown as my example is because it is still mostly a blue collar neighborhood and no one could call them rich, yet Sean did. I am not even sure why I continue to try to explain. Obviously, no one is going to change their minds here.
I did not call them rich. I used the objective definition to define the middle class to demonstrate that people with actual middle class incomes are not negatively impacted by the tax cut.
But how do you define middle class? The median home value in this country is $223,000. Your example is of a household with at least $350,000 equity in their home. Do you see the disconnect here? I think you have a very distorted version of what the income and wealth of an actual middle class household is.
You know what? I am have decided to not talk to you anymore. You make everything personal and I am really sick of it. You're not on ignore since I love to read how you know what I am thinking, but I am not responding to your comments. Have fun.
Middle class can not be defined nationally. This country is far too diverse to do that Sean. I define middle class by a region's income. NYer's do make more, but our cost of living is higher. It's not just higher in housing but in every way.
I don't know how to get people to respect a request. Amazing.
Impasse
Beg to differ Perrie but they do NOT have to pay an extra $3,300 in taxes, they simply can't deduct that amount on their federal income tax return, so worst case they pay an extra amount equal to their effective Fed tax rate times the $3,300. The average effective tax rate for most middle income Americans based on the TCJA will be in the 18-20% range (other than those with high income whose rate will be higher, or very low income whose effective rates will be far lower or even negative). So $660 is the worst case additional federal income tax burden if that were the only aspect of the TCJA that is considered.
However, in many cases the doubling of the standard deduction to $12,000 for single filers, $18,000 for HoH, and $24,000 for married filing jointly will partially or even completely erase that additional burden resulting from the capping of the state taxes deduction at $10,000, and still result in a lower federal income tax burden for the filer than would have the 2017 Code.
From what I have read so far, I'm afraid Sean is correct about who most of those are who might see a higher tax burden in 2018, but I am willing to look at the numbers once the 2018 tax season has concluded and the records are in on who paid lower federal income taxes, or had a lower effective federal income tax rate, than they would have under the 2017 code.
I'm afraid the $13,300 property tax bill itself is the real problem Perrie, and that is not a Federal issue. That figure certainly sounds more "punitive" across the board than the capping of a deduction that in most (but certainly not all) cases favored high-income property owners.
Don't forget, the middle class cuts expire soon. Not like those cuts were meant for anybody but the top in the first place. Funny how those corporate cuts never expire.
ps, those lost deductions weren't just for the rich
The root cause of the problem in the NE.
Higher salaries, higher spending per student etc. New York is number one.
Another way to look at it. It was unfair to taxpayers in other states with lower school costs, that the higher school cost states were getting such high property tax deductions.
Always more than one way to look at things
True. There’s no way that tax payers in Mississippi, Arkansas, and West Virginia should be sending their federal tax dollars to California and New York to subsidize our/their high real estate/state/ education taxes beyond a common point we all get. Having a 750k nationwide cap on mortgage interest deduction and a 10k cap on all SALT’s is very fair to everyone in the whole country no matter where we live.
I think there is some common ground there. Somewhere in-between the 10k and where it was. A one size fits all just doesn't work in my imo unless its higher than 10k but i agree. Allowing for a more or less unlimited property tax deduction artificially inflates school districts ability to raise costs higher than they should be.
With the disparity in wages and school costs in this country, that clearly doesn't work fairly.
Lol, you'll see no tears here, crocodile or otherwise but face it, there is a big difference between 10k and 60k.
I'm talking more about the working class people who aren't living is that expensive of a home because they never could afford it. Most of them aren't living in a home worth anywhere near 60k in property taxes.
I would have put it closer to 15k for them.
Because, putting a limit of 15k on something that was unlimited before is not unreasonable to me.
I see your point. I just don't agree that an extra 5k would be an issue considering the circumstances.
Shoulda, woulda, coulda, on a lot of things but you just can't waive a magic wand and make it all instantly better for everyone. No matter how one feels about it.
My comment stands for the stated reasons.
I really don't have a dog in the hunt. Heck, even my vacation property, which isn't homesteaded and is worth roughly double my house, doesn't approach the 10k.
But i can appreciate the sudden financial hardship this must put on some fine middle class working stiffs.
Not good