Many Americans may confuse their meager refunds as a sign that they paid more in taxes as a result of the Tax Cuts and Jobs Act. Generally, that is not true.
According to the Tax Policy Center, 80 percent of filers received a tax cut, and about 5 percent wound up paying more in federal income taxes. The tax cuts showed up in fatter weekly or biweekly paychecks for most Americans, but few people noticed, according to polling.
“There’s a difference between taxes and your refund,” said Joseph Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute. “People generally got a piece of their tax cut last year gradually in the form of lower withholding on their paychecks.”
Many families received a tax cut, but their refunds are smaller this year because the IRS made major changes to the “withholding tables” — the amount the federal government recommends taking out of your paycheck for federal income taxes — in the new tax law.
The IRS attempted to set withholding levels so that more people would pay correct taxes, meaning they neither owe anything to the IRS at the end of the year nor receive a refund.
“Getting a tax refund means that you gave the government an interest-free loan because you overpaid your taxes,” said Nicole Kaeding, director of federal projects at the Tax Foundation, a right-leaning think tank.
Many Americans prefer refunds, even though personal finance experts say it’s not a wise idea to get one.
“It’s a mystery why taxpayers seem to be comfortable — and even happy — with getting refund checks,” Rosenberg said.
The IRS encouraged Americans to review their withholding level last year, but few did. About 75 percent of filers received refunds in recent years. Many Americans appear to like getting a refund because they feel that if they received an extra $20 to $40 a week, they would spend it. But when they get a one-time refund of $1,000 to $2,000, they put it toward paying off credit card debt, paying down a mortgage or saving for retirement.
“I am really frustrated with my refund this year. I was expecting good chunk of change. I was going to put it toward buying a car,” said Sal Ramirez, a 20-year-old packaging designer in San Gabriel Valley, Calif. He earns $45,000 and said he received a refund last year of more than $1,200 because he puts zero withholding on his W-4 form at work.
Ramirez just got his refund from the IRS, and it’s only $900 this year, almost certainly because of changes to the withholding tables. He figures he’ll need to save a few more months for a car.
The refund situation marks the latest potential trouble for Republicans over their tax bill. They argued it would be a political victory, but it has consistently polled poorly.
Ramirez, who did not vote for Trump, couldn’t remember whether his total tax bill went up or down. He was just focused on his refund.
In New Jersey, Prugh appeared to be hit by both factors affecting refunds this year: His overall tax bill is higher, and his withholding looks to be a little lower. His family was affected by the new law’s $10,000 cap on state and local taxes (i.e. property taxes and state and local income taxes). He said in the past he normally deducted about twice that amount. He also was hurt by the elimination of the option to deduct mileage for work. The higher standard deduction under the new law did not counterbalance losing other deductions.
“I did not vote for Trump,” Prugh said. “As active as I got in the last election cycle and as active as I plan to be in 2020, this put more urgency behind it than almost any other thing that has happened.”
