By Sheri Thomas

The Tax Cuts and Jobs Act made the most sweeping rewrite of the tax code in more than three decades. The last major change to the tax code occurred in 1986, and since that time, the U.S. tax code has gone from less than 30,000 pages to more than 70,000 pages. Many taxpayers felt the impact of the changes during 2018 with less tax withholding in their paychecks, netting them a larger take-home pay. Others are feeling the impact when they file their 2018 tax returns.

TCJA went into effect at the beginning of 2018, and the IRS made updates to the tax withholding tables to reflect the changes. Employers use information a taxpayer submits on his W-4 to determine how much income tax should be withheld. With so many changes to the tax code, the IRS warned taxpayers all year to check their tax withholding to ensure they were having sufficient tax withheld from their pay so they wouldn’t find themselves with a tax bill when they filed their 2018 tax return. Many did not heed that advice.

The IRS expects that approximately 21 percent of taxpayers will owe the IRS this tax season. Those taxpayers may ask, “What happened to the tax cuts?” Many headlines in recent weeks have reported lower refunds for taxpayers, making it appear that many will not benefit from TCJA. With the conversation now being directed toward refunds, the focus has turned away from what is important: tax liability.

A tax return is filed to determine how much tax you owe on the income you received during the tax year. The return is reconciled with how much tax you paid during the year, and the net will result in either you owing a balance or the IRS owing you a refund. Tax liability and refund are two separate things. Two taxpayers could have a tax liability of $10,000, and one of them realistically could owe $10,000 when they file their tax return and the other could get a refund of $10,000. How so? The first taxpayer may not have had any withholding during the year, meaning he has to pay his entire tax bill when he files his return. The second taxpayer could have had $20,000 withheld, yielding him a $10,000 refund.

Here’s a practical example: You go to the store to buy an item that costs $8. You give the cashier $20 and she gives you $12 back — your “refund.” The next week you go back to the store to buy the same item, but now it’s on sale for $6. This time you give the cashier $10 and she gives you $4 back. Now you’re upset because last week you got a $12 refund and this week you only got $4.

When you focus on the refund, you lose sight of what you actually paid. Even though the “refund” was less on the second shopping trip, you actually paid $2 less than you did in the earlier week. The same is true with tax refunds. With the change in withholding tables to adjust for TCJA, many taxpayers didn’t have as much withheld from their paycheck (similar to giving the cashier $10 instead of $20). They aren’t getting as much back in their refund or they may even owe because they kept some of the money that would have been withheld prior to TCJA. But that doesn’t mean they are paying more tax.

The way to really understand how TCJA has affected a taxpayer is to look at the tax liability on the 2018 tax return and compare it to the amount on the 2017 return. The tax is reported on line 15 of the 2018 tax return and on line 63 of the 2017 tax return. Compare the two amounts and if the amount on line 15 of the 2018 return is less than the amount on line 63 of the 2017 return, then you paid less tax in 2018, regardless of the amount of refund or balance due.

And isn’t paying less tax what really matters?

 

Contact Sheri Thomas at sheri@sherithomasea.com.