As tax returns are getting filed and refunds are getting processed, there has been an outcry from many saying that Trump’s tax cuts are actually making them pay more in taxes. In fact, many politicians on the other side of the aisle are seizing the opportunity to make a point that benefits their agenda.
Side note 1 - I will be the first to admit that I am not much of a fan of the current administration. But don’t stereotype my politics yet. I’ve voted for Democrats, Republicans, Independents, and Libertarians. I vote for whoever I think is going to do the best job.
Side note 2 - My biggest pet peeve is when people call their tax refund their “return” (i.e. “I filed my taxes and they said I’ll receive a return of $950.”). It is my mission to make sure people are using the correct terminology. You file your tax return and if you paid in too much for what your tax burden is, you then receive a tax refund. Say it with me now: “File your tax return - receive tax refund”. And repeat a few more times for good measure.
All that aside, anyone who is trying to make a political statement about lower and middle class people paying more taxes in 2018 than 2017 is not telling you the whole truth. I’m looking at you Kamala Harris, Adam Schiff, Pramila Jayapal, Mark Takano.
The facts are – after the first week of February 2018 the average refund was $1,865, or 8.4% less than the 2017 average refund of $2,035.
That makes for an eye-catching headline, but why are refunds down when this is the first year the tax cuts have been implemented?
It’s because the IRS updated their withholding schedules at the beginning of 2018 to be more accurate. In a lot of cases, the days of overpaying and getting a big refund are gone… and that’s a good thing! Because of the updated withholding schedules, your paycheck throughout the year was bigger. You were paid that big refund throughout the year.
If you don’t believe me (assuming your total income is the same in both 2017 and 2018) – look at your 2018 Form 1040, line 15. Now, look at your 2017 Form 1040, line 63. Those are what you actually owed for taxes. Chances are line 63 (2017) is larger than line 15 (2018). If you’re in the 5% that paid more then you have a legitimate reason to be upset.
If you are the type who uses that big refund to get out of credit card debt, pay for a vacation, etc. then this is a great learning opportunity. Although, not a fun one. You are in a position where you need to take control of your finances. You need to develop better budgeting and spending habits throughout the year. And in doing so, you’ll have one less thing in your life that can negatively impact you.
Rather than loaning the government your money throughout the year at a 0% interest rate, you can save that money and earn interest income. You’ll have the same effect of the big tax refund, except you’ll earn income on the money you’re saving and be in more control of your personal finances.
If you are willing to put in the work to change your financial habits, I would love to work with you. I offer a free initial consultation to everyone. If you are interested in hearing what I can offer you, please click the button below or visit my website for more information.
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