Mr, forgets to talk about how the 1% benefitted disproportionately. The rest of us should be happy with the crumbs.
I set a baseline level of spending based on my paycheck. When it increases due to a change in tax laws, set your checking account to send the difference to Vanguard's money market fund (currently 2% yield).
Do this again when your paycheck increases after you max out your 401K and get to stop paying the Social Security tax. You will have a pile of money that can then be used for the backdoor ROTH, taxable investments, and emergency cash account.
With all of the Fintech options out there, it is very easy to save your excess earnings.
Single filers - (especially those making under 100k) who itemize are the ones who really got hurt - the loss of the personal exemption adds approximately $1000 to your annual tax bill.
1
people who don't understand taxes shouldn't write articles or comment on those articles. I am an Enrolled Agent, and have been for 3 years now. While many are complaining about the size of their refund going down, that is only a small piece of the picture. You have to look at the total income this yr vs last yr, the total tax this year vs last year, and the amount of w/h this year vs last. what we are seeing is that incomes are up, total tax paid is down, as well as the withholding. put all that together, and you get lower refunds. which had you rather have, a tax rate of 25% with a $2000 refund, or 12% with a $750 refund?
Most people don’t understand their taxes. For years I thought our household was getting our salt deductions when we itemized only to learn that the AMT swept them away. The GopTaxScam has given my household huge tax relief as we now pay $12k less this year than last year. While we happily take it, I know that it is coming from those who earned less than we did and the treasury ultimately has less to spend as the deficit explodes. This tax plan is a disaster and it was inflicted on us entirely by republicans
3
@Deirdre
Thank you Trump Voters - but you shouldn't have - you really shouldn't have.
1
If you are not going to itemize then your withholding should be zero or 1.
90% of American households will no longer itemize under the Trump tax plan
So lower your withholding and you won’t have to pay
1
The author is out of touch with the reality for most Americans. Firstly, the new tax law taxes the taxes that Americans have already paid to states, which most people could not account for in their withholdings. Second, the withholding tables are incorrect and it is not the easiest to change your withholdings at some companies. Third, it's human nature to want to get something rather than having to pay, especially when you are paying a government that claims that your taxes went down. The cost to individual filers with the elimination of various deductions far surpasses the minuscule savings in taxes. So, the calculation is not as simple as the author wants us to believe.
To say that savings account and other alternative investments for a higher weekly paycheck are too modest to be worth much overlooks other uses for a greater paycheck now rather than at tax return time. If one is able to pay down a debt like a credit card at 15%, or a mortgage at 5%, or any one of many other debts; then the extra money in hand on payday is genuinely worth than having the bigger refund.
One more thing that the author missed is that many people don't have perfectly stable incomes. Planning for taxes with an unstable income is very very hard. If my income and deductions were consistent from year to year and thus my taxes were consistent, you can bet that I would plan to have as small a refund as possible, but that is not the way it works. I usually have very little idea what my refund is going to be, so I would rather overestimate withholding than underestimate. Most years I get a big refund, but I remember a very sad year in which I owed enough to pay a penalty.
The author writes that most people saw more money in their paychecks. That didn't work for everyone, especially hard if you're a single parent, and someone who lives in a conservative, yet highly taxed state/county/school district. Not only did my paycheck go down almost $125 a check (bi-monthly pays), my refund is now lower. I did what the GOP loves us working-class citizens to do, I bought a house. Along with that house comes real estate (school) taxes, township taxes and county taxes, as well as the state taxes I pay for - I work in one state and live in another where those two states have different requirements and no reciprocity rules. I usually owe a little to my home state and break even with my work state.
This year, because I can no longer write off my SALT taxes, in addition to my withholding going up, not down, I'm getting even less back, almost $2k. Thanks GOP. You win.
There is no rest for the working class.
1
The IRS withholding tables are, at best, imaginary in the real world. When I changed mine from 4 to 2 because of supposed underpayment, the difference in Fed tax was $40 per paycheck - about 1,000/year. Yet the supposed "underpayment" they calculated was $4,000. So, big news, the IRS is incompetent and I expect to be "underpaying" again next year
And, of course, no politician will get my vote if they insist of taxing the taxes I pay to the State - money I never see. Utter stupidity.
1
"“The question that befuddles traditional economists is why people want these refunds,” said Richard Thaler, a Nobel-winning economist at the University of Chicago’s Booth School of Business. “Why do they want to make interest-free loans to the government?"
Most people cannot even figure out what "interest" is, let alone what they are paying, or getting paid ( or not). They just see a lump sum and think of what they can spend it on.
I calculated my tax-to-adjusted gross income ratios for 2016 and 2018 and discovered my taxes went down about $10 per month. But in the meantime, my withholding went down about $150 per month, so my "refund" disappeared and I owe nearly $1700 in taxes for 2018. Smoke and mirrors, or outright lies, to be frank.
2
Supply-Side economics is a fraud.
I am relatively certain that you know that very few people received a "tax break" this year. If they did, it is quite small. Wait until next year, and the year after that: the tax crunch on the lower 95% of income earners will hit with a thud.
What Reagan meant when he said that "Taxes should hurt..." was that taxes should hurt .... those people. You know: the Takers.
Many comments have noted that tax refunds are a form of forced savings that would not otherwise occur because many people do not save on a regular basis. That is a very sad commentary on: (1) The fact that many people don't have much or any discretionary income, some because they're poor, some because they're financially overcommitted with junk purchases, such as expensive cable TV subscriptions; and/or (2) the low level of financial literacy in our country.
1
@MainLaw
Beg to differ. Taxes should be higher on the wealthier (and lower on the lower half in the income distribution). That would be fairer. Increased tax revenue could be used to provide the goods and services that are not provide in the private marketplace, goods and services that you use and want --such as highways, to name just one. Don't you want roads that don't have car-killing potholes and bridges that don't collapse, again just to give examples? Surely these are the kinds of things that everyone, regardless of political ideology, agree on.
1
Our taxes should be lower. Government should spend less.
The "General welfare" of our country has become a nanny state.
@Randy L.
Beg to differ. Taxes should be higher on the wealthier (and lower on the lower half in the income distribution). That would be fairer. Increased tax revenue could be used to provide the goods and services that are not provide in the private marketplace, goods and services that you use and want --such as highways, to name just one. Don't you want roads that don't have car-killing potholes and bridges that don't collapse, again just to give examples? Surely these are the kinds of things that everyone, regardless of political ideology, agree on.
1
No surprise for working middle and low income Americans. The Trump Tax Reform did little to nothing for us, yet the wealthy and corporations got huge tax refunds and greatly reduced tax rates.
Increased wealth given to already rich and corporations has not "trickled down" in the form of more fair wage jobs or higher wages for existing jobs as touted by Republicans who passed this $1.5 Trillion dollar give away. Also the 4% economy that was supposed to offset the cost of this Trillion dollar give away has not occurred so the deficit has ballooned. I guess Republicans are fiscal conservative hypocrites after all.
In short, this is the fourth time the GOP has attempted a supply side or trickle down economic policy and the rich got richer and income inequality became worse. The wealthy and enriched corporations have no incentive to make jobs or share the lost tax revenue. As wealthy folks and corporations tend to do, they keep the wealth. Corporations gave executives huge bonuses and conducted massive buy back of stocks.
The GOP's Trump Tax Reform is proving itself fraudulent as was expected.
Perception, albeit skewed, becomes reality for many. Taxpayers have long viewed refunds as entitlements, bonuses and expected windfalls. In reality, however, they are virtual savings accounts, and interest-free loans that taxpayers have made to the federal government by overpaying what they end up owing. Albeit sometimes unavoidable, they are, generally speaking, bad financial bargains.
The size of refunds is not the milestone against which people should measure Trump's admittedly flawed tax reform. It's altogether true that individuals fared far worse than the wealthy and corporations in Trump's mess of a tax law, but the true measure of its appeal should be gauged not by the size of refunds, but by the total amount of taxes paid, and whether that number has declined, or not, under Trump.
In the case of tax refunds, feel good and be good are not the same thing.
The author here discusses psychology within a closed system; however, taxes are part of an open system that includes not just what taxpayers are paying and receiving but also what the government is doing with those taxes it receives, and who otherwise in society is reaping the biggest rewards.
As for what taxes are going toward, there is an infuriating sense of wrong when one's taxes are going to an administration that coddles dictators and even defends state-sponsored murders, when those taxes are going to an EPA that is decimating and despoiling our environment once again, when those tax dollars support leaders who are openly corrupt and are trying to weaken the Constitution, and when those payments now mean higher national debt later. Tax is not a four-letter word, and most citizens realize there needs to be a way to fund common functions in society...that's fine...what makes lower tax refunds in this era so angering is that not everyone is suffering the same weight of those lower refunds.
Under Trump, the wealthy and corporations are having a field day and the rest of us are incensed by this pandering to, and constant nurturing of, the rich...those whose actual needs pale in comparison to their wants. So lower tax refunds are just a reminder that someone out there is laughing all the way to the bank...and it's not the 99% of us.
1
This is the fraudulent tax reduction story that is at the heart and soul of conservatives and the Republican leadership. Cut taxes, starve the beast (government) and deregulate! So what's new.. used to be trickle down, deficit reduction and welfare queens. The real tragedy is a divided, polarized nation, income inequality crippling the middle class, contempt for science and education, climate change and the environment. At its core, there is a lack of principled thinking, a refusal to invest in the future and need to feed the rich to stay in power. Conservative tax policy is only for the wealthy and their businesses. This is not what made America great!
2
The reality is there is an expectation that there is an annual bonus. Not from an employer but from a tax refund
And year to year so many of us stumble into needing, depending, on that money.
The IRS would have done better by setting withholding rates to preserve the refund/“bonus”.
Yes, i noticed that my weekly paycheck increased a little. but the problem is that now I owe $1,000 to the fed and where am I supposed to get that money? It's not like I was told to save $120 each month last year to prep for this. . .
1
I cannot speak to the outrage, but the author is clearly out of touch with typical earners. For most of us "interest" is an out of reach mythical ideal that occurs only for the wealthy.
To not see how saving a little each paycheck for a payout later is preferred shows your disconnect.
4
I think that this discussion about whether it is better to get a big or small refund needs to end. Everyone has heard the financial advice, but people have different methods of savings that work for them. In this low-interest environment, the after-tax differences are minimal, so let taxpayers choose to get a large refund, if that's what they want, without sending them on a guilt trip.
1
Using average always create distortion. If
analyzed by income categories and geography,
taxes are lower for low income, increased
for middle income($70,000-$80,000)
particularly those living in New York, California,
New Jersey and own home. Generally, the
itemization would exceed so called increased
standard deduction and also deduct personal
exemption. Overall taxable income will be lower than under the new tax reform act. It is hard to know for sure how much pay check increased, split into 52 weekly pay, and if that more than offset lower refund to total up to real tax cut. No wonder so many people are confused. It was done for political reason and it is not going to help Mr. Trump and the republicans with so many people getting low to no refund and in many cases even have to pay. Mr. Irwin would do well to make actual calculations at income level of $30,000, $70,000 and $200,000 to clearly show taxes at old rate and new rate considering the allowable deductions and exemptions.
3
People are outraged because fundamental arithmetic is no longer effectively taught in our schools, and we now have at least one generation that cannot figure out basic math concepts. These people don't understand that, if their withholding went down due to the tax law, there is less of a pot of money representing tax over payment. Perhaps they should declare fewer exemptions, have more withhold, and they can get their fat tax refunds back, instead of getting the benefit of lower taxes throughout the year.
The same inability to understand fundamental math also led the Amazon opponents to think that if Amazon never came, thre would be $3 billion to spend on public needs. What they failed to understand was that the $3 billion was a tax reduction from $30 billion to $27 billion if Amazon hit its goals. So by driving away Amazon, they did not save $3 billion that could be spent on something else. What they lost was $27 billion of new tax revenue.
America is being dumbed down, and we are seeing the results.
1
Yeah, well, my tax bill was cut in half, as anticipated. We don't own a home, so we've never itemized. The standard deduction doubled, and the tax cut for this household was exactly 50%. So much for the Democrats' wailing about disallowing property taxes over $10,000 and all the harm to the middle class. Thank you, Mr. President!
@PL Are you "all" of the middle class? That's great that you saved, but so many people lost under this tax "reform."
It would have been so easy for the Republicans to have ensured that no one lost by keeping the SALT deduction and reducing (but not eliminating) the corporate tax cut, but they saw a chance to penalize states that don't support Trump. As a result, Republican congresspeople and senators are (and will remain) extinct in California and other states.
3
Please explain how that worked; not even corporations got a 50% tax cut.
Well I did my taxes and my marginal rate (overall) for 2017, including my refund received in 2018, was 31% - that's all taxation against income, Fed, NYS, NYC, Medicare, Soc Sec, PFL, the lot. For 2018, using exactly the same measure, it was 35% if I exclude a one time tax break of $7500 for buying a Tesla. So this can be spun left, right, up and down, but like many people in NYC on a high (but not that high) income, I'm quite significantly worse off.
6
i read mr. irwins Upshot column on refunds. he blithely ignores the fact that in a number of states like Califiornia and New York, our increased tax bill is due to a loss of the ability to claim state taxes and home mortgage interest and not payroll withholding.
if you live in one of these states your refund was wiped out by this republican tax bill.
2
I am a regular Joe working as a full-time employee in an office earning 70K gross a year. I live in what is now a Blue State, on the coast (Virginia). My income taxes (liability paid to the Federal Gov + State+ SS + Medicare) went down by almost $3,000 in 2018 versus 2017, and that's after a slight increase in income 3% (COL adjustment from employer)!
Around half of the lesser tax burden was provided in my paycheck, and the other half in my tax refund, which was more or less the same amount as the previous year).
I just wanted to show that someone also reading the mostly liberal NYT is thankful to Trump for the tax cut. So now, for sure, you all can blissfully carry on complaining and vying to be the biggest victim (as usual).
1
Individuals having income between 35,000 and 50,000 will have that portion of their income moved into the 22 percent tax bracket. That was a dirty trick - a sleight of hand which enabled Republicans to dump the true cost of the tax cuts onto lower income individuals. It was deliberate; and the Republicans who engineered the details of the tax bracket changes, know that no matter how loudly people complain, their voices will not matter.
2
We probably should be outraged because the entire tax reform bill was a cheat and a sham. A tax refund versus receiving the money spread out by paycheck is not the true issue. The savings by corporations and the wealthy compared to what the rest of us receive, plus the hit to tax revenue that pays for all the important things that federal taxes fund should alarm and outrage the 99%.
And another thing: Taking the measly tax savings and placing the money into a personal savings account does exactly what? With the tiny interest rates that banks provide and the fees imposed, I’ll take the lump-sum tax refund any day, and I did. Beware the politician and pundit who are going to save you money.
1
"(Early filers aren’t necessarily typical, so the numbers will most likely change as more Americans file.)"
Excellent caveat and reminder from Neil Irwin.
The WSJ is reporting that as of February 22, the average tax refund was $3,143, a 1.3% increase from the same period last year. Through February 22, about 81% of processed tax returns are yielding refunds, nearly identical to last year. Because of all the material tax changes, I am going to compare my effective tax rates from 2017 to 2018. Comparing absolute refund/payment dollars, withholdings, total taxes paid, etc. would not be meaningful comparisons.
1
Given a choice of an additional $50 kept per paycheck throughout the year, for a total of $1,200 kept in your pocket, or getting a $1,200 tax refund AFTER the year is over, most are saying it's terrible to get the extra $50 in your pocket each paycheck and they'd much rather get that "reward" of a $1,200 refund.
I got news for you... if the withholding tables were prepared in the opposite manner, such that you got $50 more withheld each paycheck ($50 less in your pocket each paycheck during the year) and got that $1,200 "reward" in the subsequent year, people would be saying they'd prefer the other way.
They'd say... "But we need more money DURING the year to buy stuff. I shouldn't have to withhold during the year, only to get it back AFTER the year."
In this country... people will complain about EVERYTHING.
Give someone a free dozen donuts and they'll complain that they really wanted two bags, each with a half-dozen donuts. Or, that you should have given them four bags of donuts with 3 donuts per bag.
Unbelievable!
The author of this article makes perfect sense. He presents the following options…
OPTION A- $50 more kept per paycheck x 24 paychecks (two per month) per year = $1,200 more kept throughout the year.
Vs.
OPTION B- $1,200 refunded to you in the subsequent year.
Anyone who would choose option B over option A is not very smart. And, if you need the $1,200 kept from you so that you don’t pay it, as a sort of “forced savings,” then you need to work on your financial discipline skills.
Those who think option B is better should ask themselves if they think there’s more hamburger meat in a ¼ pounder or a 1/3 pounder. If you think there’s more meat in the ¼ pounder, you probably didn’t pay much attention in school when you were growing up.
Yes, in a perfect world we should think about this rationally. Also, there should be no wars and we should all love each other,
Now, can we have a discussion in the real world? Most people simply can't set aside 10% of their income to prepare for major expenses. Most people are living paycheck to pay check. It may not be "rational", but it IS natural to spend what you have when what you have isn't enough. We have to craft monetary and tax policy on how people ACTUALLY behave, not on how we WOULD LIKE them to behave.
The Republican "tax cut" is an excellent example. The notion that the wealthiest Americans would reinvest their new tax breaks to create jobs is a fantasy based, again, on how we WISH they would behave. Of course that didn't happen, because in the REAL WORLD jobs are created based on DEMAND, not the SUPPLY of capital. It would be nice to think we behave rationally, but RATIONALLY, we have to admit that that's not how human behavior works.
4
@Christopher
".. because in the REAL WORLD jobs are created based on DEMAND, not the SUPPLY of capital. "
Thank you for pointing out so succinctly the flaw in the Republican tax cutting philosophy. Investors don't build factories or create jobs because they happen to have a bit of extra cash sitting around. They do it because people want to buy their products or services. And, in a properly functioning advanced economy, there is always cash for investments that generate a sufficient return. One of greatest periods of growth occurred when marginal tax rates exceeded 70%.
1
So how do you claim “0” and still owe?
Is that your payroll company’s fault?
There is a very high probability that our Dear Leader is a tax cheat. Having to pay taxes in light of that fact sticks in my craw.
6
I’ll be filing my extension promptly on April 15th to kick the can down the road on paying the IRS 5k.
You’ll need to pay that 5 grand by April 15th even if you file an extension or you’ll be hit with penalties. If you do not pay the full amount you owe by the tax deadline, even if you file an extension, you will be assessed a penalty of 0.5% of your balance due per month. The amount of your failure-to-pay penalty will not exceed 25% of your back taxes
3
Anything which causes anger in people towards Trump is a plus.
2
Herein is the lie. We were told by Trump and others that the Tax Reform Bill would result in raises from Corporations who received the largesse of the Tax Reform bill and therefore would have larger paychecks. However Trump and the Republicans forgot to explain the real reason that the workers would receive larger paychecks is because of manipulation of the withholding schedules.
So pay checks went up because withholding went down
The Administration left out the fact that that refunds would be 1/2 of what they were the year before. In addition, it was not disclosed at the time of the vote on the Tax Reform bill, that people would lose lots of exemptions or deductions they once had. The only two facts revealed was the real estate deduction change and the individual and dependent change
Hence peoples anger in the refunds or lack thereof.
Republicans in the mode of Trump have become the Party of Liars.
7
Many Americans view their tax refund as their yearly bonus, which is their fatal and tragic flaw.
1
Amazon
Pays
Zero
Taxes
Zero
1
My husband and I calibrate our withholding so we only owe about $1000 to the government on tax day (thanks for the interest-free loan, Uncle Sam!). But this year we were hit with the underpayment penalty and owe over $4000 because the withholding tables were wrong. Thankfully the government dropped the penalty (my employer told me I was at fault, but how could I know my deductions were no longer valid?), but this was a shock. Overall, I'm not paying much more in taxes each year, but with owing so much I was glad I figured this out in January, not April 14.
clearly, the whole tax bill is a scam. the main result is that corporations get to buy back a lot of shares, boosting share price, and as a result, the already overly inflated incomes of top corporate execs, who, btw, now pay less income tax. for regualr people, any tax cut is modest or non-existent. only in the swanky locker rooms of exclusive country clubs could this assault on the financial and social stability of the country be applauded.
5
Mr. Irwin misses several points about why so many tax payers are upset over the tax fraud law passed by Trump and Republicans in December 2017.
- Federal deductions for income taxes paid to states and local governments were capped at $10,000, costing workers in mostly Blue states more in federal taxes.
- The Trump-Republican tax fraud law gave huge tax cuts to the 1% who don't need tax cuts, but tax increases.
- The Trump-Republican tax fraud law creates a revenue shortfall which increases the national debt, thus saddling young workers and future generations with the tax burden for that increased debt.
8
Where is it written that the discontent with the size of tax refunds relates to wee misperceptions rather a more valid notion than others netted far far more because the tax code favors the rich?
Everybody but Neil Irwin knows the federal tax giveaways flowed to the superrich big time. Irwin is blind to federal income tax realities, not Americans living off their over taxed wages alone.
2
Taxes here in the U.S. are a dreaded and loathed thing - for those who "have" (but haven't generous spirits) the loathing is to not want to give "the government" one extra penny. For the others (the have- nots), the dread is having to owe, and the loathing is the realization that one doesn't get much for the money (as opposed to a country such as Denmark - high taxes but many social benefits, as the country doesn't have to pay for a giant standing military). So the only "little plus" for the non-wealthy was to get that little tax refund, so as to be able to replace an appliance, or take a vacation. And now that's gone.
3
I don't think the writer understands (or admits) the full tax change.
I made the same last year as I did the year before. Paid about the same taxes too.
But, this is the important part: My taxable income rose more than $8,000 because the withholding was eliminated.
How does Mr. Irwin figure it's all a wash. The measly tax break I got at beginning of year doesn't begin to account for the fact that my taxable income rose more than $8,000 OR that I couldn't deduct son's tuition or my Heloc or union dues or so many other things.
Meanwhile, my tax rate went up from 15 percent, which was eliminated, to 22 percent.
Neil Irwin, how do you explain away this?
4
I did get about fifteen extra dollars in each paycheck. Woohoo. However I can no longer deduct the interest from my mortgage, deduct the cost of working from home or my charitable contributions. I paid double in federal taxes in 2018 compared to 2017. DOUBLE. Thousands of dollars. I'm a nurse not a CEO. We need to get rid of these people and elect a government that represents the people
6
The constant articles expressing confusion about people wanting tax refunds is old. It is because of the statistic that pretty much no american has much in savings. So if you get hit with an unexpected bill for hundreds or even thousands of dollars...you are done. Even if you don't OWE money, clearly every cent of a paycheck is being sent. Seeing an extra 40 dollars a week lets it just get buried in with other money buying groceries and other every day things. Lump sums occurring outside of daily usual expenses are the only chances some people have to put a large chunk in savings or pay off a bill or get work done on the house. Yes, theoretically those 40 dollars each week could be saved for the same effect. In reality, that is not how it works.
1
Why are we parsing this to death. Do you think Republicans argue the facts? They just stoke outrage and mislead the public to win elections. I don't care is people paid less taxes. I care that people are angry, and they should be--even if they are angry for the wrong reasons. They really should be angry at the Republicans for charging 2 Trillion dollars on the government credit cards so they can write a check to their rich donors. We all pay the bills when they become due. So, if people are angry, I hope they vote Democrat. I really don't care why. It is all about winning elections and gaining power.
7
I just compared my 2017 and 2018 tax returns. For reference, I'm in the middle of the 90-99% range (see Feb 24 article by D. Leonhardt). I'm also in a high SALT state.
What I see is that rump and the republicans pulled a bait and switch, drop the withholding to make people feel they actually got a significant tax cut, but then take it all back at return time. My accountant tells me people below 90% are feeling more pain. I feel sorry for all the trusting working class people that believed the liar in chief. I'm fine with my taxes (basically unchanged), but a lot of people are really feeling some pain now.
Arguing that people are better off with lower withholding and no refund is fine - but this article doesn't mention how the republicans perpetrated a fine hoax by lowering the withholding rates to cover up their giveaway to the rich and corporations.
6
Humans need forced savings.
It is logical to deny yourself today’s total paycheck amount to accumulate 1 years lump sum
Otherwise you would spend that money on alcohol and lottery tickets
That’s the smart math
My taxes are up about 2% year-over-year because of the loss of the SALT deduction. I had the foresight to adjust my exemptions and I'm still getting a smaller refund. The reason many people are angry with Trump and the GOP Congress is that they intentionally stuck it to taxpayers who happened to live in "blue" states--a kind of economic civil warfare that will not soon be forgotten. We also understand that almost all of the savings corporations have enjoyed have gone into stock buybacks, artificially propping up the bloated portfolios of the mega-rich, while doing little for the upper middle class.
6
Lots of commenters have made great points about the desire for some folks to just save some money. Another perspective: with the complexity of the tax code, it can be near impossible to know what you will owe, especially if you have any extenuating circumstances in your taxes. Overpaying a small amount each month is way better than being told at the end of the year you owe that bulk amount.
1
My spouse did not "see" much of take home pay last year. We have always been the typical. average mid income family. Over the 40 plus years of joint returns we have gotten small amounts back, broke even as well as paid. Most of the lack of enough paid in was due to not understanding that the disability payments I receive is taxed. I have at least 20% taken out which helps to break even or get a couple bucks back. No more than $100 refund.
We own our home, no deductions apply to us. Cannot imagine what we will owe on 2018 taxes. I even upped deductions based on the small raise I received hoping we will not get hit with paying back.
My tax preparer always calculates my ‘effective tax rate’ and includes that in the documentation she provides to me once my calculations are completed. My tax rate INCREASED in 2018 by 0.5%. Not a lot, I know, but certainly not a tax cut. And yes, Republicans, I know the difference between a tax rate and a refund. So there!
4
When it comes to taxes, average may be downright misleading. Consider this; if Jeff Bezos walks into a small bar the median taxpayer may move by one - or not at all - but the average tax paid goes through the roof. Mr. Irwin ought look at tax impact on the median taxpayer. We have a pretty good idea that those at the top made out like bandits. But we're more like the median taxpayer - and more interested in impact of Trump's tax bill on MY tax bill. And, I suspect most other NY Times readers are also.
1
The significant tax issue for my family isn't withholding, rather, it is the loss of many previously allowed deductions, e.g. professional development, non-reimbursed business expenses, State taxes, and even the deduction for tax preparer expenses. Rather than "helping" my family, the new tax codes cost us a proverbial bundle. And, yes, I live in a "Blue" state.
9
If it is "true" that "most Americans received a tax cut in 2018," then I guess it must also be true that most Americans do not pay as much property taxes and mortgage interest as I do. Because despite having almost the same income, my tax bill went UP not down.
9
Rational or not, people look at their refunds as a forced savings plan, and any change in what they traditionally are used to getting back can be overwhelming. It is like banking on a Christmas bonus only to find that it is half of what it used to be. If you get $2500 back every year, you think you have $2500 in your pocket - just waiting - to pay off that car repair, or replace the dishwasher. You are in trouble when it doesn't materialize.
People don't notice the extra $50 per paycheck, and spend it. They do notice the $2500 they get in a lump sum.
I always wonder why economists start with a "rational man" assumption. But then again, I also don't understand how economists can miss the draw of invisibly and effortlessly putting money aside only to have it appear magically in March. Bad finance; common practice.
3
Not bad finance. The lost interest compared to a savings account is a few pennies. The fees not paid on that account, a few dollars.
2
At $50 per week and today's interest rates, the time value of money is pretty much irrelevant to someone living paycheck to paycheck. And a small increment is likely to just trickle away in daily spending. Like the old Christmas Club account, a lot of people use that interest free loan to the IRS as a method of forced saving to accumulate a once a year lump sum that they otherwise wouldn't save.
6
Is simple for me. Less money back from taxes less I put in to the economy. No new car. No updates to house. Less spending on restaurants. Less to Amazon. No big deal to me.
5
We never got much back in a refund, perhaps less than $2,000.
I did not notice an increase in my paycheck, but there must have been one because the Greed Over People told me there was. Must have been miniscule.
I just did our married filing jointly taxes. We are getting back just over $500. I was afraid we'd owe as I was going through the computations.
I know people who usually got money back and are now paying. So a "rational" explanation of how this is better is not going to convince people, especially when the wealthy benefited more than anyone.
15
Our pension checks went up a measly $492 for the entire year with the new tax tables. While we usually get a refund of about $300, this year we will have to pay the IRS approximately $7000 by April 15. We are a 5-figure family including both pension and social security. This is outrageous!
16
@Sandra You can thank the GOP by voting Democrat in 2020. Vote to repeal your tax increases. Remember, the GOP wanted to punish you because you lived in a blue state.
4
The article correctly states that lower tax refund simply means that lower taxes were prepaid, i.e., less taxes were withheld, which meant that each paycheck in pay periods last year was higher. The article is also correct in stating that lower refund (or even writing a small check to IRS when filing tax returns) is good for people.
However, the article misses the main issue. Trump tax cuts, worth $1.2 trillion, provided most of the benefits to corporations and ultra rich. including his own family. For example, by eliminating estate tax, Trump, and billionaires like him, will be able to pass his wealth to his kids tax free, saving them nearly $2 billion (assuming Trump's net worth of $4.2 billions).
Everybody at the top got invited to the tax cut party except the middle-class. They are outside, looking in. And that is the real cause for the anger. People understand the lower refund, but it is only when they calculate their tax bill at the end of year, they realize the actual amount of tax cut they got.
And the deficit from this mega cut, mostly for the rich, is threatening the social safety net that is so important to the middle class. People are rightly angry about that too.
12
@Independent Citizen It is only going to get worse. The tax cuts for the middle class sunset while the benefits for the rich stay forever. This is about as good as it gets.
8
I did my taxes today.
I file jointly with my wife; we have no dependents.
Using the new standard deduction reduces my taxes more than the itemized deductions would have and the new tax rate saves me even more.
4
The GOP (via paul ryan) planned this bait and switch as a part of the tax give away to the corporate and the rich; and hoped that extra feel good each week would cover up the wealth transfer heist of working people and would get them the election in 2018. Well, that one did not work out, and now the party of grift and graft is getting some well deserved heat.
7
$500 difference? No, there are way too many stories about owing thousands.
No surprise here, spin it however you want, but the sole purpose of the tax cuts was money for corrupt Trump and friends.
18
The innumeracy, passivity and lack of self-discipline of the average American is disheartening.
5
I consider myself supremely innumerate, but if I want to lend the government money, I buy a bond - at the highest interest I can find.
@Earthling
On the surface, sure. There's definitely some issues in the USA about 'keeping up' and desires, but a significant chunk of it is that salaries and wages have stagnated for the past 15-20 years whereas costs (rent, housing, food, supplies) have shot past the tepid growth in wage.
The minimum wage that folks speak about, the magical $15, is partly shocking because for some folks (probably including you and me), our wages and have kept in line with cost increases and we have a hard time noticing how difficult it is for the average American to survive.
America's failure to its own people is what is truly disheartening.
1
A lower tax refund or owing the government money is the insult to the injury. Very few people actually saw a meaningful increase in take home pay due to the tax cuts. If anyone saw any reduction in taxes it was eaten up by increases in insurance premiums. Now one has to pay taxes instead of getting a refund! And most of the tax cuts went to the wealthy! There's the outrage.
7
Behavioral economics? Here’s what’s lost in the arrogance of eggheads. Many Americans are not good savers. That’s a well known fact. What’s not well known, probably because some “smart” people know what’s best to get a tax scheme passed, is that those savers use over-withholding as a way to force themselves to put away money for larger family expenditures, such as paying off Christmas bills and the coming summer vacation.
So imagine getting your tax refund and realizing that you and your family are staying home this summer.
5
"In the long run, we are all dead."
There's nothing quite like listening to an economist explain that everything would be OK if only we were all a little bit more rational. With respect to Mr. Irwin, maybe his analysis should conform more closely to the way people think and not, as he suggests here, the other way around.
3
I get the premise, but my tax rate remained unchanged. It's remained constant over the past five years. Thank you TurboTax for giving me the numbers to see that. Only my refund this year was significantly reduced by almost half. So forgive me, if this seems like more of a parlor trick than an actual tax cut. And while I appreciate that a few dollars more per paycheck can be beneficial, for those of us in the lower income brackets, it is just that a few extra dollars. Mine went towards increased health insurance costs. And this was the major accomplishment of the Republican government over two years?
12
No. People are upset because the 'tax cuts' were positioned as that - a decrease in taxes, not a change in how tax withholding works.
6
when you say people, please define your terms: "people" did get a substantial tax cut if they were in the very upppermost stratosphere of the income spectrum, or had many millions to leave to their progeny ; Republicans do not consider the rest of us as "people" at all, so, no tax benefit for us!
For many of us, especially those who are both middle class homeowners and residents of high SALT places, it's not the lower "refund" that has us outraged. It's the drastic increase in our overall tax liability. And the fact that the additional funds being extracted from us are mostly going to corporations and people much wealthier than we are. The loss or capping of so many deductions and exemptions is like a sharp reduction in income.
31
Exactly!
5
@Working Mama I think about 90% of people are now taking the standard deduction...it seems that the $24,000 married, filing jointly standard deduction is fait...perhaps the states in those "high SALT places" should reconsider their system...
2
@Jim it is a factor of the higher overall cost of living in economically productive areas with a lot of jobs. Not "Cadillac" public services.
5
It just goes to show that many people don't have any knowledge about the tax system and it works.
It's always amazing how when people here about federal income tax cuts, they forget it doesn't affect Social Security and Medicare and state and local taxes. For many people, these taxes far outweigh federal income tax.
4
More now and less later - doesn't matter how you explain it, it's about perception.
You know it, I know it and so do Republicans, who chose not to run on it at the mid terms.
Perception of less - right or wrong - when it comes to money, means Republicans will be punished at the ballot box and deservedly so - the lions share went to the wealthiest among us.
6
omg, Once again, an economist showing why they're so out of touch with real life.
While my net tax is close to equal , I now owe due to the changes in withholding that were so poorly communicated.
In the real world.
This is the part that economist and politicians continue to overlook. They are so wrapped up in their own bubble , that they fail to understand the real world implications of what they do .
Many people over the years have enshrined their discretionary savings, vacation, xmas, whatever, into their withholding as a method to ensure it was their waiting for them in April.
I doubt that people aren't paying attention to the bottom line, its that their surprised to find out they spent that vacation already.
Economist do calculations on the population, but forget that we're individuals. The social fabric of tax refunds is just as important as the dollar value.
Economists never, ever,(yes I said it again) seem to acknowledge that fact. Nor Politicians.
So, yes, we're outraged, and rationally so!!!!!!!!!!!!
PS - I owe money. I'm not impressed with my acumen at getting an interest free loan from the FEDs for a year.
Is it really worth $20 bucks in interest foregone to care.
NO!!!!!
7
@Paul I think people were told to check their withholding last year...
2
So, if one’s tax rate didn’t increase why in heavens would it be necessary to change one’s W-4?
1
If we love what we do, working more means making more which in turn means paying more taxes, we all should want to pay more taxes. Now back to work!
2
Short answer: because people are stupid. Contributing factor is the lack of basic math education. I am still amazed that in a society such as ours, which is more and more heavily credit based, there is zero education on compound interest, how under the right circumstances it can be extremely powerful, but under the wrong ones extremely destructive. Warren Buffet called it the eight wonder of the world, but that is only because he has probably never been overextended. Ask Joe the plumber who pays the monthly minimum on his credit cards when he will pay off his bill, and I bet you that 9 times out of 10 the answer will NOT be "never"
8
@Groovygeek Agree with you and I wonder if some of these people who 'save' via a refund (the social fabric of refunds?) are carrying credit card debt.
1
A good reason to aim for little to no refund is to limit the risk if a thief files in your name.
2
The author writes as if this was all some benign policy-wonking that caught up with ordinary Americans. First, it's possible "most" Americans received a tax refund, but it's estimated that between 43 & 48% of working class and middle class Americans actually had a tax increase. Those aren't small numbers nibbling around the edges. That is a LOT of taxpayers and households. The IRS had planned to release withholding tables that would have taken into consideration the changes in deductions, exemptions, etc. Putting those together was taking too much time (and laid to bed any notions of 'tax simplification'). The tax bill was proving extremely unpopular among most Americans in January of 2018, so 45 and Mnuchin ordered the IRS to issue new withholding tables that would reduce everyone's withholding - "so they would feel like they got a tax cut". Oh sure, somewhere in the fine print, it said you should refigure your W-4 based on changes in the law for which regulations hadn't even been written yet. This was done for purely political reasons - the GOP planned to run on the tax cut for the mid-terms. The GOP knew that mid-terms would be long over when 2018 returns were filed. If the GOP was really thinking of the average working joe - they would've been on Fox News talking about the importance of reviewing and recalculating your tax withholding last spring and all summer. Instead they kept talking about everyone's bigger paycheck-knowing it was a lie to many.
5
I have never understood the rationale behind that adage, that you shouldn't want a refund at the end of the year because that just means you gave an interest-free loan to the government. There's no reason to think that way unless you're a gov skeptic/libertarian (or an economist, apparently). The psychology of a receiving a nice check at the end of the year rather than very small increases to your paycheck seems pretty obvious even from those who don't study such things.
And it's not as if you would really get any sizable amount of interest if you took home more each paycheck. If you put that money in a savings account (maybe 1 or 2% APY) throughout the year, it would barely add up to anything. So "an interest-free loan" assumes that you could get interest on that $ if you took it home, which is not really the case. Even if you invested it in stocks (which you would have to have other money to add it to), assuming a reasonably good ROI, you're looking at a negligible amount of money made.
The reality is, most people do not have the financial wherewithal and diligence to sock away that extra bump in your paycheck every two weeks. And most of us would rather have little to no risk of owing MORE money at the end of the year just for the sake of getting that larger check throughout the year. It's a ridiculous premise.
7
Your point amounts to saying you want the government to manage your money so you get a surprise after filing. Regardless of how much or little you could earn on the small difference in your paycheck, you are giving up control...and assuming no one needs it to live paycheck to paycheck. Luckily I'm not in that situation, but I'd rather manage my own money than (hopefully) have a surprise present.
If you prefer to have a forced savings account, you could increase your regular withholdings or reduce your deductions, but don't force that on everyone else.
3
Very well said, thank you.
The majority of Americans will no longer itemize because the new standard deduction is $24K for married filing jointly. Only those with mortgage interest > $15K will itemize. The rest of us will take the standard and that's it. So if you used to itemize, and now you won't, you needed to lower your withholding to zero or one.
The GOPTaxScam is a terrible plan that starves the treasury and favors the wealthy - but it is not complicated
6
Writing this piece preaching the time value of money to the masses, when New York, Connecticut, New Jersey and California are among states suffering from the SALT limit punishment inflicted by Trump on liberal states to pay for his trillion dollar tax cut for the wealthy - with 11 million taxpayers taking a hit - is tone deaf at best, and Trump-gladhanding at worst. https://www-nytimes-com.cdn.ampproject.org/v/s/www.nytimes.com/2019/02/26/us/politics/treasury-salt.amp.html?amp_js_v=a2&_gsa=1&usqp=mq331AQCCAE=#referrer=https://www.google.com&_tf=From %1$s&share=https://www.nytimes.com/2019/02/26/us/politics/treasury-salt.amp.html#referrer=https%3A%2F%2Fwww.google.com&_tf=From%20%251%24s
15
@common sense advocate punishment or not...the limiting of SALT deductions makes a lot of sense...I would suggest eliminating them...
1
what about eliminating tax on liquor at NH package stores?
1
Perhaps I'm angry because I now have to take the standard deduction, and this is 9k less than my itemized deductions from last year. Perhaps I am angry because big financial decisions like buying a house had the rules changed in the middle of the game. Perhaps I am angry because I paid 19k in childcare expenses, none of which are now tax deductable. Perhaps I am angry because we the people were scammed by Trump, Ryan, and that horrid congressman from Bakersfield. And quite frankly, I preferred the refund.
20
@Jason I think child care expenses come with having children...
3
"The tax law that President Trump signed at the end of 2017 reduced the average American household’s 2018 average federal income tax obligation by about $1,600, according to an analysis by the Tax Policy Center."
But the average income tax decrease for middle class is in the range of $ 250-500 dollars or less and $65,000+ for the top 1%. Not to mention the billions of taxes cut for large corporations. Trump is very much the con artist Cohen says he is and we are his latest suckers.
7
Why give an interest free loan to the government?
3
why drink sodas? why eat at fast food joints? why watch the Apprentice? why drop out of high school? why buy packaged and prepared foods at quadruple the cost per pound? why believe in the afterlife? why think more racism will make America great? why think Mexico will pay for a wall on our border that slaps our friends there in the face? why smoke? why waddle around vastly overweight? why vote for Republicans if you are not a millionaire or operating a hefty pass through? there are a lot of questions, mostly sharing the same answer.
Averages, shmaverages. My 2018 AGI (5 figures) was within $300 of 2017. Tax liability nearly doubled. Thanks, Mitch and his band of thieves . .
12
I'm an 81 year old retiree (redundancy) and the new tax law cost me at least $11000 in deductions. Everybody in a high tax state will have a similar experience. This is the Republicans plan to punish states that provide adequate benefits to their citizens. These states have been supporting poorer states for years
The Republicans and their constituents are despicable. They are leaving a country to their descendants that will be best defined by 1984
What a country!
18
@Bronx Lou I like the limit on deductions...maybe the few high tax states should reassess their policies...the $24,000 standard deduction seems to work well for 90% of people...why should that change for a few high tax states?
2
@Bronx Lou
Similar status, but a little younger, and a single:the loss of deductions is painful and will probably force me to move. $24,000 covers a lot of taxes, $ 12,000 does not. It is not, in the Northeast, cheaper to live as one.
4
I think the frustration stems from the fact that most Americans have no savings. The refund was there terrible and, I agree, irrational method of saving without actually having to put much effort into it.
4
An entire conservative treatise to rationalize the new tax laws by explaining to us what everyone should already know...
It's not the tax refund you receive, it's the taxes you actually paid that matters.
1
Maybe the bigger issue which is not adequately discussed in this article is that 2018 IRS withholding tables, which appear to have been released without time to do adequate analysis, resulted in gross under-withholding for many people. The cynic in me believes that pressure from a Republican administration anxious to demonstrate before key mid-term elections the value of a very ill-advised and rushed tax cut might have had something to do with that...
In our case, with most of our income coming from labor wages (we're "muppets", in that regard), we ended up making about $25K more in W2 wages, while withholding nearly $10K less. And this after a very competent CPA calculated our estimated taxes based on the TCJA for a break even at refund time. Needless to say, we are experiencing a nasty surprise at tax time and will be writing quite a large check.
I find some of the arguments about rational personal economics somewhat patronizing, in this respect.
The new law is basically a smash and grab for the 1% which is blowing up an already severe deficit, and the Republicans in the rush to please their donor close haven't executed it very well either.
Repeal the law, give the IRS the money and people to do their job correctly!
9
I live in one of the punished blue states with high SALT. We would be considered "upper" middle class - married filing jointly - our effective overall federal tax rate went from 14.1% in 2017 to 16.1% in 2018. Not happy and want this horrible Republican tax law reversed for many other reasons.
12
Thank you. Lower tax refunds does not mean your taxes weren't lowered. Seems obvious, but many evidence confusion on this point.
3
The problems are twofold: most Americans are financially illiterate (through no fault of their own); the Trump/GOP tax bill was designed to penalize the average homeowner and reward the upper tier of investors.
We should teach high school students (all of them) a course in financial literacy, so that they know how to manage what they earn, avoid scams (like the phony “Advisors” scams designed to make banks rich on retirement savings), and avoid the traps designed to strip them of what they’ve achieved.
And we should vote for legislators who will roll back the Trump tax scam and institute financial policies designed to reward work, penalize scammers, institute sane tax and inheritance policies, and have the ultra-wealthy (especially) pay their fair share. Corporations, too, should be unable to avoid paying taxes (as Amazon did this year). Oh, and yes, reduce and ultimately eliminate the national debt. All these things can be done.
5
If the election had been AFTER tax season, even the Senate might have fallen to the Democrats. There were a number of purely cynical moves by the GOP in the tax bill. The combination of state/local tax deduction caps, the higher standard deduction AND the end of the personal exemption conspire to increase taxes for many more than the models estimate -- even with the reduced rates. Our tax bill is up about $1,400. And all to pay for an apparently useless corporate tax reduction -- without any corresponding removal of corporate tax loopholes. All we got was a bigger national debt and some momentary increases in corporate profits or purchases of stock that increased portfolio values -- until the President opened his mouth or slapped new tariffs on someone and the real economic consequences are revealed. If this wasn't enough, the withholding rates were artificially reduced in ways that didn't account for the increase in actual taxes owed. This is a tragedy.
8
Due to the new tax law, I was able to deduct $10,000 of state and local income taxes and real estate taxes. I actually had $22,639 of this category of deduction but can only deduct $10,000. This is huge. The new tax law only helps very high earners/the ultra-wealthy. Middle and lower upper class are certainly paying much more in taxes, especially if you live in a Democratic state rather than a Republican one.
7
@Jonathan
It's a massive tax hit.
4
Every year I tweak my withholdings to come out as close to even as possible at tax time, neither owing the government nor receiving a large refund, for the same practical reasons the author has cited. But because of the change in withholdings, this year I owe $1500 to the IRS, quite unexpectedly. Too bad the Trump administration didn't mention that we should save those extra dollars in our paychecks, knowing that we would have to send them right back at tax time.
12
A tax refund usually implies too much money was take out of one's paycheck. It's pure math. Too many are using the excess taxes as a type of savings account.
Why give any government more of your money than necessary?
At tax time, there should be $0 owed and $0 returned. It's a break even proposition.
We really need higher wages more than we need tax refunds.
5
I had thought myself reasonably average. I retired with social security and good retirement savings (IRA, 401k). I honestly don't see how anyone owning a home wasn't hurt by the tax changes. I was hit by the loss of the personal deduction and the cap on state tax deductions. I paid $950 more income tax than I would have under the old tax laws. I was lucky in that I only exceeded the cap by about $350, but the loss of the personal deduction was something over $4,000.
7
What I hear is that the smaller refund MORE THAN EATS UP the weekly increase.
So, that’s not OK, not on today’s dollars OR next year’s dollars.
1
There is only one relevant number on a tax return, total tax liability. Despite that fact, only a small minority of taxpayers could tell you what that number is and why it is true. And none of this speaks well of the educational system in the US.
3
If middle class people are getting more money per paycheck but losing their end of year refunds, then Trump's tax plan is a wash for those people. They aren't keeping more of their income, they're just getting it incrementally in each paycheck rather than in a lump sum when they file for refunds. Middle class people expected to get more per paycheck AND their usual refunds at the end of the year. That would have been putting more money in their pockets. People are now finding out they've been conned. Big surprise.
9
I loaned money to a relative, a few thousand and, after a few months she began paying me back at . . . $25.00 per month . . . as that was all she could come up with. What good did that do me? Virtually none and, while I was able to absorb and eventually just forget about the loan (payments stopped after a year or so), it's annoying and not dissimilar to this situation. Even if she had paid me interest it would have been a loss in the long run as I never would have had that 3 grand again. A big chunk of cash is worth more than a bunch of little chunks any time, logical to the ivory tower economists or not. And, of course, a loan to a relative is, in fact, a gift.
4
I've become a student of MMT Modern Monetary Theory and have come to realize of how we think of taxes and money is as outdated as the gold standard and wonder why do we still think in terms of it in our thinking when the govenment can just push a button and create money? And apparently without inflation as we have seen since the recession. The only reason taxes exist is to make our currency valid because that's how we pay our taxes.
2
Don't you have to pay a penalty if you pay at the end of the year? The penalty is actually much more than what you would earn from that money ($50 to $100/month)
2
@Reader
It depends on the amount, but definitely people don’t want to risk owing and especially not owing a penalty. Lots of people would be hard pressed to write the check. They could guesstimate and save it out of their paycheck themselves I suppose, but it’s not like you get any interest doing that either.
1
@Reader the average person wouldn't likely incur a penalty as they would probably owe less than $1000. Also, we are generally talking about people who usually expect $1k+ in refund as their forced savings plan. If they got $100 extra dollars a month that's only $1200 and they'd be short maybe $200.
1
@Reader only if you underpay by a certain amount. I believe it is more than $1,000.
1
The problem is the majority of the American public doesn’t understand that their taxes aren’t what is withheld from their paycheck, it’s the total owed for the entire year on the applicable line of the 1040. When commenters on my local Republican congresswoman’s facebook page noted happily that their paychecks increased by $40, I wanted to reply that only indicated the withholding had changed, they would need to wait until filing in 2019 to know the true impact of the tax bill.
5
I didn’t get a smaller tax refund, I got a tax INCREASE of 20% over last year (2017). I’m so sick of these stories on smaller refunds. For many, many Americans, Trump et al RAISED OUR TAXES. And no, I did not exceed the SALT cap. When you take away $16,000 in deductions and replace it with a $12,000 standard deduction, your taxes go up.
Let’s just wait until the numbers come out. It will show a sharp increase in federal tax payments from NY and California, exactly as designed.
34
@Mike -- That $12,000 is really $8,000 because you have lost your personal exemption, $4,050 last year.
2
I just did my taxes. As a percentage of after tax income, mine rose 1% from last year. But my net income is down about 30% from 2016. I would much rather have paid 1% more in taxes and had the income back I lost after Trump took over. The reason my income went down so much is that my little business exports about 1/2 of all sales. The export market for me under Trump has withered away.
99
@Bruce Rozenblit
Of course, the typical tax payer is not in the exporting business. So a cherry picked outlier case gets most recommended and becomes a pick by the NYT.
Let's be objective and look at what "Typical Joe" ends up paying in taxes for 2018.
3
Agreed.
It is the change in your net after tax income that matters, including state, city and other taxes.
The refund or lack thereof is the final piece in the equation of what impact will the new tax code have. For me, in a blue state, the net is higher taxes. So, that lower refund is just hammering home that unpleasant fact.
My state struggles with attracting business. Did we see much investment as a result of the tax cut ---- which was supposed to cause a boom in business investment? Absolutely not. We're at the same place we were before the tax cut, just with taxpayers who have less to spare.
68
@SAO so true.
3
The author is underestimating the fact that withholding has become a way to force oneself to save to pay debt or pay for an expected big expense. It is a planning device. The discipline imposed by withholding is worth the interest free loan to the government.
94
@DM It's essentially a 0% savings account. And I thought the GoP was a big fan of reinforcing the savings rate of the American middle class.
1
Well, bank savings accounts are essentially no-interest accounts these days. But you have to actually deposit money in the bank, week after week, religiously. It’s much easier (and foolproof) for the ordinary taxpayer to under-withhold and let his employer set it up so the bank is the IRS. That’s why people are upset about lower refunds. $5/week is nothing; $250 at year end actually buys something.
37
Yes, the author does not understand that more withholding each week is far easier to save for most workers. Expectations are a refund, not a payout. My effective tax rate went up 3% because of the state income and property tax caps in the new code. I am firmly middle class. Our congress is not doing me much good. Don't hate em, just think they are kind of clueless.
6
The tax cut from the Trump administration was just another example of the gaslighting of the Middle Class while the 1% bought another painting for their yacht. Where are all those jobs the tax cuts were going to create? Where are all those huge raises everyone was going to receive as a result of the tax cuts? No jobs, no huge raises only stock buy-backs.
8
From a broader perspective, it's not irrational to prefer the lump sum in April, over the modest increment in each paycheck. People know that they don't save enough money. And they look forward to buying some large special treat with that large lump sum payment in April. The modest increment each month is just spent on normal living expenses... come spring there's no savings available to buy the special treat. It's rational: the government is their savings plan.
98
@patrapp - Especially since putting money in the bank these days results in an interest rate that is little better than nothing. Even bank money market funds pay almost nothing. OTOH, a small weekly or monthly increase, which is what most people would experience, would not be particularly appropriate for potentially more lucrative investment in the stock market--and don't forget that word "potentially".
13
@patrapp- it seems well worth forcing a little discipline on one's self by automatically sending that extra $50 per paycheck into a savings account to keep the government from benefiting by holding onto your own money. I send the government only what I owe them at the last possible moment. A dollar now is worth much more to me than the promise of a dollar in a year.
6
@Annie you can put it into an IRA that is invested in mutual funds.
1
I would much rather get a $1,300 refund than an extra $50 in a bi-weekly paycheck. The extra $50 gets lost in the shuffle of monthly bills and expenses and is barely enough to take my family out to eat. A $1,300 refund can be used to purchase goods and services that can jolt the economy.
8
@Eric Mandell if that $50 is used for an automatic investment plan, it could wind up being a good bit more than $1,300 at the end of the year.
It doesn't have to get "lost in the shuffle" if you plan for saving or investing that specific amount every month.
4
@Eric Mandell
If you aren't living so close to the bone that you need every penny of after tax income to live on, you CAN also save very small amounts in an IRA or Roth.
Once an account is opened at Vanguard STAR, for instance, which requires an initial $1000, you can set up any amount of transfer on a regular basis. $1,000 would take 40 weeks to save if it wasn't available but once opened, that $25 a week, after that initial purchase, @ 6% annual return ( based on VGSTX's annualized return over 15 years of 6.84%), over 5 years is worth $8843. Over 10 it's over 19,000, $5000 more than put in. not so insignificant.
1
As part of the budget negotiations later this year the Democrats ought to roll back the tax cuts for corporations and billionaires, the SALT limits and make the working class tax cuts permanent. If necessary end a few wars to pay for it. This article makes it pretty clear that the author is out of touch with how many many of our fellow citizens are forced to live paycheck to paycheck while the owners live hansomely.
7
This is why things cost $99, and not $100. It's all in your head.
7
It's incredibly patronizing to publish this article without mentioning the now extinct SALT deduction or the myriad giveaways the most recent tax law has provided to corporations and the ultra wealthy. "Probably shouldn't be" outraged? Give me a break...
20
But it's not just about people having had too little withheld from their paychecks. It's more difficult to qualify for credits that many received previously. The press should tell the whole story instead of spinning it.
7
The “tax cut” you speak of... didn’t pan out- even with what little extra was in my check- I ended up paying in $3100- no win here! And I was claiming zero exemptions! I can only imaging how bad it would have been had I actually claimed myself!
I can add and this one doesn’t pan out as a tax cut! And nope, didn’t make more Money this year.
So put me in with those that are really angry.
6
Neil, I think you missed the point. The mid term elections were on the horizon when the latest Republican tax giveaway was passed, and the Republican government needed to make people think they got a bigger tax cut than they really did. So they cut the average person's tax rate a little bit and altered the withholding tables so it looked bigger in their paychecks. Reality arrived a couple of months after the election at the end of the tax year.
9
@Robert
Now we have to hope that people can both comprehend this and keep it in mind long enough to vote these Republican shysters out of office next year.
3
Every year we withhold single zero and every year we pay at tax time. This year we got back $4000 and our total federal tax bill is $12,000 less than last year even though we earned the same income as last year
The change in tiers and the higher AMT threshold means my family now pays significantly less. You might think that’s great but all I can think about is how the treasury is now bankrupt and it is due to the fact that our wealthiest citizens pay far too little
So keep voting republican and giving me tax breaks and i will keep saving every penny
10
@Deirdre For all you wealthy people who bemoan the fact that the wealthy"pay to little" guess what? You can always choose to donate directly to the US government and pay more in line with what you think you should be paying. But most of you won't. You want the force of government behind it so all your rich friends who think you should pay as little as possible are forced to pay what you want them to pay as well. From 1996-2018 Americans have donated almost $54 million to reduce the national debt.
1
@Stephen wealthy people voluntarily sending in extra cash to the government will not effect systemic tax change. That is the point of the comment.
2
At a 1% rate of interest, this discussion about Present Value is silly. Quite simply $20 a week gets lost in the shuffle compared to a $1000 refund check which can actually buy something.
Are “economists” that far removed from reality? Not this one.
9
Newsflash: people are broke. For most of us, tax refunds are the only “savings” we’ve got every year. It’s how we afford to fix the car, repair the roof, buy a new fridge. I personally claim zero so I am taxed as much as possible over time. I can not afford to PAY anything in taxes and use every penny of my refund for necessities, like an oil change and annual car tags. NYT maybe you should look at how the many, many millions of working poor are dealing with even less in refunds while those making more money we can imagine are paying NOTHING in taxes.
13
This just another example of the financial illiteracy of the typically American. Clearly given a free loan the government for 12 months should not be anyone's goal. But people are so bad a saving that anything that forces it even at a zero interest rate looks good. Just another argument for some kind of mandatory financial education in high school to help understand things like this and how paying off credit cards first is your best possible investment.
6
The fact that you have to write this article in the New York Times says a lot about the financial literacy of the typical American.
6
People don't notice a change in their take home pay because their contribution to benefits goes up a little each year. My guess is that for the average worker, even if they did get a small tax cut, they didn't notice. However, when your tax program shows you what your refund was last year and what it is this year, it is clear to see that you lost money. Furthermore, those people in Blue States may be paying significantly more. We're taxed on our taxes. Remember the cry that we can't tax inheritances twice? Even though the person receiving that money never paid taxes on it even once? No one bats an eye over the feds taxing the money you gave to your state in taxes. That's truly double taxation. So, if you thought Trump was going to help your bottom line, and you are not a rich person in a Red State, you are in for a surprise this tax season. Rich people got a tax cut. Everyone else...not so much.
8
My son has not yet done my taxes for me so I have no idea how the new tax law will affect me. I don't live in a high tax state and my mortgage interest will still be deductible, but I'll have to wait and see.
Since I'm retired, there is no standard "withholding" - I pay estimated taxes. I overpay what TurboTax says I should pay, each quarter. Why? With interest rates as low as they are, it's not like I'm losing hundreds of dollars in interest, and I don't like surprises in April. I usually have overpaid enough to cover my 1st Qtr Estimated taxes, and since I have already saved to pay these, I look at that money as "mine" now and can use it as I wish. I have plenty of savings, and at 75, have no debt other than my mortgage. I usually spend it on extra maintenance/upkeep on m house - having trees pruned, a new fence section etc.
Money is not about economics; it's all in people's minds. I once had a friend who said her mother didn't have a pot to pee in but considered herself a very wealthy woman who was just "temporarily" short of cash. On the other hand, her mother-in-law who actually was a very wealthy woman, considered herself "poor" and just knew that poverty was just a small financial misstep away.
If economists can't understand that, they only think they know about economics.
6
"...the average American household’s 2018 average federal income tax obligation by about $1,600, according to an analysis by the Tax Policy Center." But the distribution is not equal. The top 1% gets a 3.8% increase in income (an average of $56,000 per person) The middle quintile gets an average of $589 increase, while the bottom 20% gets a 0.8% increase — on the order of $200.
The $1600 "average" quoted is completely misleading. It's like saying you have an average temperature of 98.6° when your feet are in a block of ice and your hair is on fire.
23
No, I’m upset that I can’t deduct my mortgage and house taxes. That’s where we lost thousands. No journalist will write about the loss of the mortgage tax, which effects homeowners.
7
@Electroman72 Mortgage interest is still tax-deductible up to a mortgage balance of $750k. Presumably in Houston, you don't have a mortgage that large. Also, you have no state income tax, hence the first $10k of property tax is deductible.
2
@Grafakos You don't seem to know how tax-deductibles work. I'm not sure exactly what Electorman's financial situation is but I have a mortgage and personal property taxes that I can no longer deduct due to the increase of the standard decuction but I still came out better this year than last year. Anwyay, with the doubling of the standard deduction, itemization of mortgage, personal property, SALT, etc.. might be eliminated for many people. That and the elimination of exemptions could increase your AGI. This in itself may not increase your tax liability as the tiers have been adjusted. Still, I believe that most "average" homeowners that aren't in the upper income levels, are better off even though they may no longer be able to itemize deductions as they have in the past.
2
I’m asking......If you’re married and have itemized deductions exceeding $24,000, are you no longer able to itemize? If you can still itemize, then I’m not understanding the complaints about from people who no longer have enough deductions to itemize. If your itemized deductions are less than $24,000....and you now get a standard deduction of $24,000, you’re better off, aren’t you?
Neil you really need to study behavioral economics a little bit more. A dollar today is worth more than a dollar a year from now is almost wholly irrelevant to the average person who gets a tax refund. For one thing interest rates are extremely low. And youre talking about little chunks of money in each paycheck that would not even get a full year's interest. So the amount of money they are getting upfront instead of in a refund is probably 20$ more at most even accounting for time value of money. Secondly, people plan big purchases around their refunds. People tend to not be good at saving little bits at a time to make these big purchases. This is all behavioral economics 102.
6
A year from now when this all shakes out the calm conclusions here will prove to be false. No mention here of the loss off mortgage interest write-offs which for many areare substantial.The author here can’t credit ordinary people with the ability to do math, citing psychological shortcomings instead.
2
What people don’t understand: A high refund means that you’ve been “lending” the USG money for all or part of a year—money that you could have invested to earn more money. Better to have a low refund.
2
As my father used to say to my Yale educated brother "You're so smart you're stupid!" First, it isn't $50 more, it's $25 dollars EACH. Second, yes, people love to see their paycheck go up. but they will probably blow it on little unnecessary things that they enjoy, and mostly forget about. That is why many of us LOVE a big refund , and prefer it to a small increase. $25 is dinner from KFC or Chinese Food instead of pan fried burgers at home. $1,600 is a down-payment on a car or Disney. Or, maybe, $800 on the car and $800 into the IRA. Get it?
8
Some reporters aren't rational about how they report stories (but probably should be).
I'm upset not because my refund went down but because my taxes went up under this plan. Our household had a federal tax increase of ~5%. Our state and local taxes remained the same. I am not talking about refund, I'm talking about overall taxes.
This tax increase really hurt some members of the middle class, and it was unanticipated based on how the tax bill was presented-- I thought we'd owe about the same in taxes and adjusted our withholdings in anticipation of that. We owe thousands in April, whereas typically we either get a small refund or break even.
Speaking locally to friends and family members, I'm finding we aren't alone in owing more to the federal government this year. Was this really a 5% tax increase? Or are we filing incorrectly? What is going on this year?
Stop treating us like idiots. Start obtaining solid data, reporting facts and figuring out who was targeted by these tax increases (which were sold to the American public as a tax 'cut'), and how badly households were affected.
7
@Megan I totally agree. My taxes will go up.I believe part of the plan was to punish the people who live in states that need to provide aid and better services. These are generally the "big city" states and those big city states have higher taxes and home prices which amounts to a smaller deduction and a higher tax to pay. The cities are more often blue so it follows republicans want to stick it to us.
4
Extra $1500 in taxes this year, so I am not your straw man complaining only about my refund. Btw: I know exactly who is to blame for this change, and the rest of America does too.
See you at the ballot box!
8
I am one of those who saw an increase in my tax burden. My In-laws, both in their 80's, also saw an increase in their tax burden because they received half of their income from a County Pension fund and now do not have the deductions to off-set we have counted on for 20+ years.
The GOP directed the IRS to publish false withholding guidelines for the sole purpose of making the Tax Scam seem better than it really was. Suing the government for that little accounting trick... I am ready to sign up.
I really don't care about your thesis, Mr. Irwin. In reality, this Tax Scam transfers borrowed wealth from the middle class to the Super Rich and further inflates the vast gulf between the 1% and the rest of us. How it "feels" today is of no consequence. It rips off 99% of us and makes Trump richer with a new shell game.
Some future Democrat will try their hardest to correct this imbalance, but they will be blocked by the paid-off GOP in the Senate.
33
As a former tax preparer: Many of my clients are aware of the "interest free loan" to the government, but are happy to make it. The "refund" is a form of forced savings for many things: property taxes or insurance premiums that may come due in April; possible big ticket purchases; a vacation (!) ... the list is endless. These folks are sufficiently self-aware that they will not save up from the "$50 a week" to cover these expenses. The lump sum serves their need.
For my poorest clients, the relatively huge refunds (in some cases 20-30% of their annual income) arise from the refundable Earned Income Tax Credit, and the Additional Child Tax Credit. While the former can be paid in installments with salary, that would presume the taxpayer has stable employment, even if poorly paid. This is frequently not the case: the taxpayer wishes to avoid any liability to pay back advanced EITC if their earnings do not match expectations.
The choice of money now or money later does not seem irrational to me, even if the maximum economic benefit is not achieved.
8
Even though I use the single person withholding rate and take the standard deduction, I had to pay $1800, plus a $27 fine for not withholding enough, plus was admonished to pay quarterly taxes in the future.
Granted, I had an unexpected small dividend from an investment, but unless the taxes on that are 60 percent, the alignment of my withholding with my tax bill is way off.
If the Trump administration truly wants to make taxes simpler, the withholding rate better should better align with the taxes due. It's common sense.
1
@Roxy - The withholding tables are notoriously poor, especially for households with two wage earners, or households with multiple income streams. The only way to be sure is to estimate tax liability through a "pro-forma" return. The IRS published 2018 tax rate tables in June (?); one had plenty of time to make the estimate and adjust withholding as needed.
@Roxy I'm going to guess you make significantly more than the "average" American if your numbers are to be believed. Even then I'm not sure your "small" dividend was that small if you all of a sudden had to pay $1800 this year.
@Steve
From Yahoo News?
"While most taxpayers will have a lower overall tax bill this year because of the Tax Cuts and Jobs Act of 2017, improperly adjusted withholding tables resulted in many people’s employers not taking out enough money each paycheck to cover taxes."
This is what you get when you have a bunch of inept Yahoos taking on a task they are not capable of. We can't trust the IRS or the Trump admin to do a competent job. Average people like me suffer. And I do make well under 6 figures.
Is it possible that the IRS, after Trump announced a cut in the agency's budget by $239 million in 2017, understood the politics and psychology of refunds described in the article and reduced withholding more than the 2018 tax cut warranted? Perhaps they knew that taxpayers writing checks instead of getting refunds (even if they had more money by doing so) would be an immediate political hit on the Trump administration. My guess is a Democratic administration elected in 2020 would seek to expand the IRS's abilities (thus budget) to collect revenue rather than curtail it. Maybe the IRS thought so, too.
I will pay this year but I'm in a blue state and the Congress wanted to punish us. On top of that, I did my withholding incorrectly. Yet, the idea that most people would rather have a little more in their regular paychecks instead of a bigger refund is missing the point: most people are not all that disciplined to save the extra few dollars, so getting a lump sum is more valuable to them. They can then take a little trip or buy something.
1
Hmm, an extra $50 every two weeks, or a $1300 lump next year? I would much rather have corporations and the 1% paying their fair share.
12
Another major reason for the reduction of refund has to do with the cap on State and local tax deduction, and the decision to put the 4000+ exemption into the standard deduction, thereby excluding a significant segment of individual who used to itemize and are able to deduct their charitable contribution and State and local deduction.
The group that got hit the hardest are the one who no longer have children under the age of 16 and have achieve significant financial stability to actually own a home and are used to deducting the property tax associated with home ownership.
Here in OH, it is not usually for homes even in the 300000-400000 range to have property tax approaching 7,000-8,000. Then there is State income tax, city tax, school district tax... If there were no cap on SALT, they might still be able to itemize, but with the cap, they are stuck with claiming the standard deduction.
16
You should not aim for a refund, unless you like making an interest-free loan to the IRS every year. Instead, the goal should be to owe the IRS as much as possible, short of triggering a penalty.
That said, the *reason* refunds are lower is because Trump's tax adjustments reduced paycheck withholding to provide the illusion of lower taxes, but now that people are filing their tax returns, they're recognizing that it was only an illusion.
Moreover, most people in states with high income and/or property taxes have experienced a sharp tax increase due to the $10,000 limit on deductibility of these taxes.
5
The Midwest Contrarian agrees. An old carpenter adage ‘measure twice and cut once comes to mind. This is another instance where taking a deep breath and thinking and not just responding out of emotion would have been beneficial.
Next time, think twice...
1
So the main problem with using the average change in tax obligation (about $1,600 according to the linked document) is that the average is obviously very skewed by the top end, and since inequality is so bad in our country, this $1,600 is mostly just a reflection of how fabulously wealthy the top 10% or so of earners are, with a little help from the market-distorting effects of the TCJA (e.g. the pass-through income deduction, of which 44% of the benefits accrue to households earning $1 *million* or more per year).
If you look at the distribution of the cuts in that analysis from the Tax Policy Center, you will see that the lowest three income quintiles will see $60, $380 and $930 reduction in taxes respectively. So those making about $86k and less are seeing $75 dollars per month and less in tax reductions. So when the bottom 60% of earners are seeing very little change in their paycheck with the new withholding and then are getting surprised with much less refund at the end of the year while it is explained to them that they just aren't being rational enough, they are going to feel shafted, which is what happened.
It's like Paul Ryan's tweet about the teacher getting $1.50 more per week and how great that is for all of us. Now if only that teacher had thought to be born to a wealthy real estate developer, her tax cut could have been so much more.
13
@Jason Well said, sir.
2
@Jason
Yes! I'm a teacher for 33 years and along with 2 other part time jobs, 2 room mates AND the $1.50 per paycheck I can now afford a vacation...in Milwaukee!
1
The "Flaw of Averages" is at work here. Mr. Irwin states that, according to an analysis by the Tax Policy Center the average American household's federal taxes obligation will be reduced by about $1,600. He doesn't say that the same analysis also contains the following statement: "After-tax income will increase by a greater percentage for high-income than for low-income." I also suspect that those whose refunds went down were also disproportionately affected by specific changes in deductions and exemptions that were unique to their circumstances i.e., loss of exemptions for older dependents, etc. resulting in a real increase in tax. The only behavioral economics issue at work here is called "loss aversion", the very real pain from a tax cut with significant hidden consequences.
7
A fellow commentator already voiced my first thought. Tax returns are a form of forced savings. You can't spend what you don't have. A check for a few thousand dollars at the end of the tax year is simply deferred consumption. You want that money for something big. Maybe a vacation or a new water heater. Whatever. You definitely don't want to owe anything to Uncle Sam. Loaning the government money every year provides piece of mind with an incentive.
That said, the main problem with taxes this year is Republicans eliminated most of the middle class tax deductions. You need a lot of deductions to top a $24,000 joint standard deductible on your federal tax return. If you claim the standard deduction on federal, you can't claim deductions on state returns. Trump effectively raised taxes on the middle class.
I can't speak for everyone. However, I saw my tax return drop by about one-third this year despite increasing my witholdings on the W-4. My household take home pay went down. So did my tax return. I'm paying more because of Trump and I live in a very Republican state.
Outraged is an understatement. I'm apocalyptic.
6
@Andy I live in NY. I expected to get hit hard, and we did. I am shocked that so many people didn't see this coming before the election. In fact, the GOP has been trying to hurt the middle class in this way for a long time, by disallowing the full amount of state and local taxes and property taxes.
4
This should have been a front page article....
3
I didn’t read to end, but dollar today vs. dollar tomorrow doesn’t apply to retired folks who don’t get a paycheck.
2
What ? You don’t pay taxes ? Congrats ! Or is it you do get SS income and other checks , i.e. being paid.
@Will Eigo Of course, I pay taxes, but I don't work so no paycheck, no withholding etc. Yes. I get Social Security, a pension. and interest and dividends from investments. The Trump tax cut affects me in that I can't fully deduct my high property taxes and don't know whether the new standard deduction will compensate.
3
@Victor Sasson - good luck. The GOP decision to end the deduction for state and local taxes was aimed squarely at higher-tax/higher service states.
2
Rationally; who is rational? There are nobel prizes dedicated to humans' irrationality.
1
Imagine you could save $30 per year on desserts if you bought all your desserts on January 2nd and held it in your house to be consumed slowly throughout the year.
You stuff your pantry full of Oreos and waffle cookies, the freezer is chock full of ice cream and pies.
Of course there's the risk that you actually don't partition all of your Oreos out throughout the year. You might eat half a box while sitting on the couch watching Netflix.
I know it's hard to imagine Americans doing that but bear with me here.
For the low salary of 9 cents a day, you are now forced to spend self-control and mental energy every day on not eating things that are in front of your face.
You're poor, tired, and sad about both of those things. What do you have to make you feel better? There is ice cream in the freezer...
It's obviously a terrible plan!
And yet, most Americans would earn about $33 in interest by investing instead of using the free savings plan. That's 2% compound interest on $250 per month contributions over a year.
9 cents a day! My peace of mind is worth ten times that.
And auto-deposit doesn't fix this. You can access that money. You need to remove the decision from your life to remove the stress.
Forced savings and not buying desserts are two of the healthiest things anyone can do for themselves. It's very rational unless 9 cents a day gives you more joy than going to a movie or eating half a box of Oreos (in which case you might be an economist).
6
Uh, you can also change your withholding.
@tanstaafl
Yes, you could withhold more or less, but the question is whether it's foolish to withhold more, considering that you're not earning interest on that money. Is it worth the presumed interest (at 2% on the average return, around $2.50 per month) to risk accessing that money before it comes due?
I tried to provide an explanation of why it might be worth $2.50 a month to withhold more than you owe using an analogy.
It’s quite rational. In exchange for a few make-little-difference dollars you have a lump sum to buy your children warm weather clothes.
19
People didn’t save the extra money per paycheck. They just spent it. Now at the end of the year the “extra” money is gone. And they don’t have that savings. If they had saved the extra money they would have it. But we as a society have “ I want it now” mentality. Well they had it and it’s gone
3
It's perfectly rational to be disappointed when something good you have come to expect doesn't happen.
4
If tax payers could only have confidence that (most of the time) our tax dollars are spent wisely and the resources distributed equitably. But so many of them lack critical reasoning skills and are so easily deceived by lies.
4
@a goldstein I beg your pardon?
16% of the total budget for defense is not tax dollars spent wisely.
54% of the discretionary budget for defense is not tax dollars spent wisely.
Spending more on defense than the next 12 countries combined is not tax dollars spent wisely.
2
Sorry- New York residents with big property and income tax bills got hurt by the tax cut bill that refuses to subsidize high tax states no matter how you try to game it. If New Yorkers had great services, excellent streets, world class airports and mass transit the bitter pill of NY income and property taxes would be easier swallowed. As it is we just get higher taxes and crappy services with a legislature that is constantly in the news for corruption and bad government. People are voting to leave the state in droves further exasperating the problems that government refuses to fix.
6
In those States where there is no State income tax (if you look they are RED States) you didn't lose a deduction. In the Blue States where the State tax is significant and now non-deductible you may owe money....and that's just some of the areas where you lost deductions.
7
When President Trump and The Republicans in Congress passed the tax bill, I remember reading in the Times that the tax break for lower and middle class filers would dwindle every year after the first year. Why is that not mentioned here?
9
I'm sure you're right. Many people don't act rationally (think of the number of lottery tickets sold every day) and many others don't even know what's going on. People hate writing checks and they love getting checks.
Therefore, the government should set the withholding rates at 150% of the actual anticipated tax liability. Then, people would get big refunds and be happy. They'd be making large interest-free loans to the government and loving it. The government would have so much free money that it could finish the wall along the border with Mexico (while maintaining that Mexico paid for it) and build another one along the border with Canada, just in case those pesky brown people got on a boat to Canada and tried to sneak into the U.S. from there, the better to create a crime wave.
I really should be Secretary of the Treasury. I'd have this economy humming and ticking in no time.
10
We want fair taxes. And a refund is nice when we see corporations using loopholes to pay less. We are taught by them that to pay our full share is to be taken advantage of. So a slightly lower tax rate and few allowed deductions are just confusing. It kind of a break even for a lot of people.
2
I am outraged.
I learned yesterday that I can no longer deduct mortgage interest or tax preparer fees.
The individual deduction was increased for everyone. However, since I can't deduct the two things mentioned I'm at the same level as renters and those who use digital tax aides.
I can't deduct mortgage interest but landlords can deduct EVERY EXPENSE they incur for their rentals. What a sick system.
WE THE PEOPLE must hire/elect Socially Conscious Women and men who will give 99.9% of us a BIG tax break and tax the inherited/stolen wealth Robber Barons at 99.9% until the national debt they have run up is paid for.
13
@njglea Trump is a landlord, why would he allow the tax law negatively affect his business?
8
@njglea
You can deduct mortgage interest up to $750,000.
I know housing in Seattle is expensive but $750 is still over the median price in our very wealthy city. We only went over that for less than a year.
I agree that the giveaways to business are ridiculous but I don't understand the special benefits for rich people houses. Even on the Eastside, you can find a family home with 3+ rooms for under $750,000. Going over that is a luxury and I don't think it should be subsidized.
2
Thank you, L.
Realtors and developers have taken over the kieys to Seattle and Washingtopn so they can enrich themselves at the expense of 99.9% of us.
Greed is NOT good.
1
"To reflect those lower taxes, the I.R.S. published new tables to determine how much employers should withhold from each of their workers’ paychecks and send to the government. This meant most people saw larger paychecks immediately."
The article misses a few points:
1) The limitation of the SALT deduction to 10K affected a lot of people in high tax areas (especially property taxes). As a result, the employers tax tables were screwed up in the amount of withholding. When I ran the IRS tax calculator it recommended that I drop my exemptions to zero and have an additional $500 per month withheld relative to the tables. Had I stuck with the withholding tables, I would have owed about $7K when I filed.
2) There can be severe financial consequences for not having enough withheld. Making quarterly additional payments is just a pain, but being off a lot can be really harsh in terms of additional tax and interest.
4
I don't think anyone in government communicated that tax refunds would be declining. They sure did tout the paycheck increases.
People have come to rely on and expect their tax refund to be consistent over the years and weren't properly warned about the new tax scheme.
9
@CG To be fair we were warned. Everyone knows who Republicans are and what they do best.
3
It is the same thing. If you pay for lunch with a twenty dollar bill you get more change than if you pay with a ten dollar bill. But if you pay with a ten you have the other ten in your pocket all along.
Saving money is hard work and most people will avoid it at all costs, including making an interest-free loan to the government. What is really sad is the refund "present" -- which also could be saved or (better) invested, but is almost always blown on something "I deserve." What I "deserve" is to have no emergency cash and no chance of adequate retirement funding, and that's what we get. And let's not even get going on how this magical thinking grossly distorts government taxing and spending policy.
6
The economic impact of “over” withholding on individuals is minimal at low interest rates. Not having to write a check in April but rather recieving a refund check seems the more appealing way to go. No problem here with the current scheme.
The 2017 tax bill is the larger economic disaster. It disproportionately rewards the very wealthy in most states and gives away too much to corporations as well. We know that it will almost certainly increase the deficit (and national debt) when 2017 and future revenues are counted.
Furthermore it did not simplify an overly complicated tax code. The 1040 basic instruction booklet is 117 pages long. This does not include forms and instructions for various subsets of income. There are 2,213 publications and forms listed on the IRS website.
We need a simpler federal tax code that is FAIR for all filers.
12
As a CPA, Mr. Irwin's assertion that a tax refund is an interest-free loan to the government is true. However, and in this case it's a BIG however, with the tax cuts for the 1%, most of my clients did not see a larger paycheck and now with a minimal refund, or no refund, they are paying way more in taxes than before.
Adding to this on a more macro level, my bigger concern is not only are the majority of working people paying more in taxes, but it will be far from enough to cover the exponential rise of the deficit we are likely to experience once we really see the effects of this legislation; a massive reduction revenues coming into the Treasury Department. Coming soon to a theatre near you: the final onslaught to kill Social Security and Medicare.
65
@Julie K
I find the author's argument almost funny in his attempt to hide the obvious point Julie makes. Thank you, Julie for raising your argument. Mr. Irwin, shame on you!!!
6
Yes, people are paying more in taxes, while the rich and the corporations are getting a big tax cut. So unfair. The GOP *raised* taxes for all but the wealthy. We now know what they meant all along by tax cuts.
9
The assumption here that we don't understand the concept of a refund is insulting. My overall taxes went up; meaning that I paid a higher percentage of my earned income to the government. Whoever this "tax cut" is for it is not meant to help a public school teacher and divorced mother of two.
83
@Debora. Understood!! So many people though just don't figure it out for whatever their reasons. I was a nurse and also divorced mother of two. Lived cheap in a tiny house, figured out how to use the tax system to my advantage by putting literally every spare penny into an IRA writeoff, owing as much taxes as I could at tax time so I had more in my pocket to put in my IRA/401K during the year. It was tough, but it payed off. Good luck!
4
@Debora
This is exactly right. People aren't outraged because their refund went down. They're outraged because overall their tax rate was flat or went up while the richest slice of society absconded with pallets of cash. Which was obviously the intended outcome of the Republican tax adjustment and was predicted by anyone with a functioning brain.
19
"We aren’t always rational in how we think about money."--or anything else.
And some more (or less) than others. Rationality is a virtue; irrationality a vice. "Non-rational" applies to rocks--they can be neither rational nor irrational--both would be category mistakes.
Virtues/vices are (probably--assume unless you know better) distributed in the human population according to a bell shaped curve. Relatively few completely rational or irrational. The mean/median/modes are at the crest of the curve. For the average/median person--half the population is more, half less rational.
Virtues are good traits; vices bad--by definition. But the standards of good/bad are not set by definition. Each may set his own--but these too can be more or less rational (meta-rational).
But some--usually professionals and academics have more coherent, consistent, informed value systems. So deference to them is rational--just as in health care and auto maintenance.
However economists have a very narrow conception of rationality. One that often makes perfectly normal (ideal) emotion/motivation/action irrational.
It's not economically rational to care more about your kids than yourself. They are rarely good investments in terms of dollar returns. Being a good neighbor might cost you too.
There is no guarantee that being a good parent, friend, neighbor, citizen pays off--certainly not for soldiers/ebola caregivers. Heaven was invented as the court of final rewards/punishments (Kant).
5
@Michael Kubara
Reagan wanted tax to "hurt" because he wanted less government more Moneyball; less political/economy regulation, more private wealth regulation. From the POV of micro economics (households) macro-economics is irrational.
Household savings (including tax refunds) can be good. But if everyone does it, it's depressing. "Your spending is my income" (Krugman).
1
Given the current state of play regarding budget politics and shutdowns, I'm opting for no withholding, pay as you go (if you have to...if you are on social security only you might not have to) and settle up next April. If there is another shutdown I'll have access to my money because I will not have given it to the government for "safekeeping" until my refund arrives.
2
The condescending tone of these arguments is symptomatic of a rationalization of a poorly designed tax INCREASE.
1) If there was a tax cut in my pay check, I honestly did not notice because other funds (health insurance, for example) increased.
2) The 1040 now also looks like an increase in taxes. We live in Maryland, we cherish the education and services and protections that our property and state taxes pay for here. We are not asking a no tax state to fund our state, but would prefer that they also raise their educational standards, environmental protections (we are all down stream), and support for their citizens. Our taxes are going up.
3) We used to have an incentive to give to charity, but there is no way it will be more than the standard deduction now. Oh well -- sorry -- volunteer fire dept ... Bay restoration fund ...
4) People are correct to be outraged at the tax scam. The WaPo and The Upshot should better explain the rational reasons tax payers are outraged rather than condescending to tax payers as irrational.
43
The argument that higher SALT taxes paid in blue states is due to better services is misleading at best. The real reason is the vast disparity in cost of living throughout the US. New York and Mississippi get the same 10k SALT deduction cap, but how much more does NY have to pay to attract teachers?
1
If one thought of the tax refund as an interest free savings account, the standard economic analysis falls quickly apart. Most banks charge customers to keep their money in the bank unless they have very high balances. Thus a $1500 refund is more that trying to save $1500 in a bank. The bank will charge you $25/month.
22
@Donald Tomaskovic-Devey
Don't use a bank. Use a credit union. Far fewer fees.
1
People who take standard deductions and have allowed with holding of the appropriate amounts over the year should not be expecting refunds but should expect to pay less overall taxes in 2018 than the previous years. Now people who took itemized deductions are in for surprises because the rules have changed and there are limits on what loop holes and mortgage interest. Those in homes greater than a half million or a million will find that the $10,000 limit for interest on mortgage may be lesser deduction than the previous year. The tax filing is simplified but with new limits and no loop holes
One thing that has happened is that the annual IRA limit has been increased as follows
2018: $5,500, 2019: $6,000 (under age 50)
2018: $6,500, 2019: $7,000 (age 50 or older)
I hope the new congress doubles this so that Americans save more while they are not on social security. Of course when they draw out from the IRA they will have to pay taxes at the the rates that exist during the time they start drawing. Those with 401K plans can also set aside supplemental retirement based on the limits.
1
What I don't understand is how the withholding tables can be SO far off. Over the past decade by filing as single people with zero allowances (when in reality we're married, filing jointly), my husband and I have managed to keep our taxes owed or refunds within a plus or minus $1000 range. With little change to our income from 2017 to 2018, we now owe $5000 in federal taxes, primarily due to lower withholding. Why is there no tax status for married, 2 earner families? The IRS seems to be stuck designing withholding tables for 1950s era one-earner families. Surely they can do better.
8
@SLP Agree 100%. Who knew that two income earning families needed to ask their employer in 2018 to take out an additional $150 per paycheck (in addition to claiming 0 exemptions/single) in order to avoid owing money in April? And I have two kids--if I was child-less it would be even worse.
1
@SLP The IRS tried to do the right thing, but it was taking too long and wasn't going to give middle and working class people the answer the GOP promised them. Last January, 45 and Mnuchin ordered the IRS to publish and implement withholding tables with across the board reductions - "so everyone would feel like they got a tax cut". This was a purely political move as the tax bill was very unpopular at the time. They knew this would happen and didn't care because the results would land after the mid-terms (when they thought their GOP majorities would be safe).
1
@SLP I don't buy it. Those numbers make me believe you and your husband are highly paid to go from +/-$1000 to -$5000 in what your payment/refund is.
This may be a novel thought, but I bet some people actually realize that $100 more per month is not really a bargain, especially since this slight increase was paired with a giant tax cut for the wealthiest Americans. If government programs for the middle class are decreased or shut down to help the top 1% hide even more money in the Cayman Islands, $100/month is not going make up for subsidized healthcare, pay for a child's college tuition or replace social security and Medicare. Some people understand that today's cost of living is do-able only when a shared burden in the form of taxes allows the government to pitch in.
28
Something this (and other) articles ignore is that, in order to save money so it does not trickle away on expensive lunches and impulse purchases, some one has to do the work of stashing the money away in a secure place on a regular basis. True, the government does not pay interest, but it does do the stashing and accounting and refunding. It behaves, in fact, almost like a money manager. Unless the rate of interest is really high, many people find this service to be worth giving up accrued interest.
13
I'd rather have a bigger refund. Most of my friends are reporting that the increased personal exemption does not make up for the exemptions they lost so they are paying more in the long run.
10
Of course it is better to have the money sooner. The problem this first year is that the new forms for 2018 were not available to do an analysis and Change your withholding. I had to wait on my state taxes because it still hadn’t issued the final forms until earlier this year. Now that we have the new forms and can run a pro-forma analysis, we can change our W-4 for the correct withholding for each individual. It should be much smoother next year.
3
@Jeff, when the withholding changed last year I did a "desktop" analysis with the information available at the time. As a result, I took the additional income in my take home pay and had it added to my withholding (W4). I was hoping to mitigate owing more in taxes in 2019. Well, I STILL owe $2500 to the federal government and it could be twice that if I had not acted back in February 2018.
2
Why arent people talking about paying for that big tax break for the rich corporations? Our Social Security will be diminished. The military is facing cuts to their health and welfare. The military commissaries are raising prices. The military families are paying more for prescriptions. Medicare premiums have been raised. And, lets not forget that Trump has not signed the order to give federal employees their raises. Vote out the GOP in 2020!
39
Another point you are missing is the impact of the limitation for deduction of state and local taxes (salt). I lost about $12,000 in deductions because of salt and saw my effective tax rate increase 1.5% result in probably a $2,500 higher federal tax bill.
31
While what you say is completely true, however you miss two key points.
Although what you say is true, ie having money in your pocket now is technically better than the IRS giving you a big refund at the end of the year, this doesn't matter if people overspend during the year and having no big refund to pay a big yearly bill that comes due.
Also, on a related topic, people are paying about the same or more tax while Trump corporate welfare tax cut added trillions of dollars of debt on the average joe's tab.
22
The Republicans plan to punish blue states worked. With the SALT cap, many of us are paying more. But it also backfired, costing the party many Congressional seats. It was great to see that fact show up in the Cohen tv hearing. Especially at the end when all the remaining questioners were Dems.
27
I live in a ‘red’ state and was punished, so I don’t know why the media keeps touting this as a blue state thing. All middle class Americans in all states are paying more in taxes.
3
I live in one of the few places in the world that doesn't have withholding: Hong Kong. Yet it doesn't make nearly the difference that many conservatives (like me) might hope because the free market fills the breach to create withholding-on-the-fly.
How HK taxes work: In early May you get a statement from the government showing your preliminary tax assessment. Soon after, you get a rough equivalent to a US 1040 where you can itemize the few deductions HK offers. Then, sometime between August and October, you get a very large bill. My taxable HK income fluctuates, so in some years my bill is roughly $6,000, and in others it's $30,000. Regardless, the bill requires me to pay 75% of the amount the following January, and the remainder in April. Lather, rinse, repeat.
Now, how do Hong Kongers pay that first big check -- the one that fiscal conservatives hope would be super-painful, so people will want to keep government cheap and in check?
Tax loans.
Every bank offers them. Starting in early December, you get scads of emails and phone calls offering low-low-low tax-loan rates, usually conditioned on setting up direct-deposit of your salary. You then make an automatic payment each month.
So, it's a withholding system that's operated by banks instead of the government.
If you're good at managing your money, you avoid withholding. If you aren't, you arrange it for a small fee. To me that's an OK tradeoff, but it dilutes whatever incentive a high payment might create.
10
What is the HKer cannot get approved for the loan ?
@Will Eig As in the US, HK’s tax regime is progressive. Unlike the US, there’s no negative tax (EITC) for low-income workers, so even the poorest pay something, albeit an almost-token amount. But despite income inequality that objectively is far more dramatic here, there’s a stingy culture of saving, quite different from the US. Poverty is indeed a big problem here, but tax payments don’t even register as part of it — not with the least affordable housing in the world: https://www.scmp.com/business/article/2182980/nothing-be-proud-hong-kong-tops-table-worlds-most-expensive-housing-market.
Add a little psychology into economy studies, and you will easily understand: Most people are not disciplined enough to save money on a regular basis and in small increments. But they love to have some "unexpected" larger amount of money available every now and then. That's what the tax refund is for them.
One can extend this to many other situations, too. People have difficulties putting away money for retirement, once they have "seen" it. It might be better to have opt-out 401Ks, i.e., plans that save money by default, and where the person has to opt out, than plans that one has to opt-in.
15
So basically it’s a wash for average Americans at the moment.
In the long run though you will pay higher taxes based on their new methods as inflation goes up people will continue to move into higher brackets.
So how did the corporate tax cuts go? What was their income increase or decrease now that the every day population is on the hook for all the spending?
8
In 1980, due to my wife's lucky $1 raffle ticket, we won a desperately needed new car. The down side, if any, was our income tax situation flipped from an expected $700 refund to owing about $1600 which we did not have readily available. A credit union loan resulted in the taxes being paid and a brand new car for my wife at less than half price. A great financial deal, but it hurt so bad to write that check that I swore I would try to avoid ever having to write one again. Rational? Probably not, but very human.
12
Fact: State & local taxes deductions are now capped to maximum of $10000, not “just” the property taxes.
So, for those who own a house, pay state income taxes & local taxes, the refund IS less because the Taxes ARE HIGHER.
Trump lied again.
145
@M I would point out those who have SALT far above the $10,000 cap, voted for the people who approved those taxes. With the Cap, people will now take a stronger interest in state and local expenditures and the taxes required to fund them. Many have already voted with their feet as shown by the strong exodus from NY, NJ, CA & IL during the past year.
4
@M
Yes, how many places in the US have S< that are higher than $10,000. You guessed it: blue states on the east and west coasts, where the cost of housing is high. So, this tax provision that apparently helps the wealthy also penalized the middle class that lives in those states and pays high property taxes “SORRY,” to quote Drumpf.
19
@M Yes! and Fact: No more personal exemptions. So, for many, many Americans (even with the 'extra' standard deduction), their taxable income is higher. While they may be in a lower tax bracket, their tax is about the same as the prior year! I am seeing it over and over as I prepare returns for 'middle class' taxpayers. The QBID (section 199A) deduction for passthrough entities is a huge slap in the face for those who work for wages. Unless you have minor children, your tax "cut" is close to non existent. Yes, Trump lied again as did everyone who voted for the TCJA!
31
Why do people not understand that the federal government was underwriting parts of what people paid in State And Local Taxes? Why should the federal government contribute more to states that have an income tax that what is contributed to states without income taxes? Poor NY. The highest state income tax in the country along with a large portion of the highest paid people in the country. So, now those high paid people are not getting to write off a percentage of their SALT to reduce their federal income tax.
I am not an economist. I am a government accounting professional. If you have less of a tax obligation, then each pay day you get a little more money in your net, you should know that the money is coming out of your refund. Add the total yearly net increase* for the pay year to the amount of the refund received and it will be very close to what you received last year.
The increase in the standard deduction and elimination of personal exemption do not equal each other. If you never itemized, and did not do so this year, you will receive a higher refund check. Add yearly net increase* to the refund check to prove that.
* You have to factor out increases to health insurance and higher contributions to other benefits. Many government workers saw their net pay decrease if they did not file an updated W-4. That was because health insurance premiums increased and if 35 and older, with an age ending in 0 or 5, life insurance premiums increased.
3
@WillWho -the Government wasn't "underwriting" people's SALT payments - it was simply not taxing your taxes. An extreme example would be someone whose entire earnings were consumed by SALT payments, thus having zero net income, and yet, out of that zero income, still having to pay hefty federal taxes.
22
@WillWho -
"the federal government was underwriting parts of what people paid in State And Local Taxes"
Then why did Mississippi receive$2.13 for every tax dollar the state sent to Washington in 2015 while New York received 81 cents?
16
@WillWho
You are ignoring the fact that a lot of the taxes paid by those of us in the North go to states like yours because you don't tax your locals enough to pay their benefits. You get way more in payouts from the feds than we do!
5
And you miss the point with this opinion piece. The withholding tables were manipulated to make the law look better and people were not properly warned. Explain that away.
71
Trump was elected by a coalition of the irrational, so his defeat by that same hypo-logical group would be fitting.
This tax-refund-as-bonus-money fallacy has bugged me for years. People are indeed irrational when they are not being downright dumb.
5
Agreed, humans generally aren't good at managing money. We do like perceived windfalls and we hate bills while we love shopping. Most people have month left over at the end of the money, not the other way around.
We also love excitement and risk which turns the stock market into a huge casino with people always trying to "beat the market." We respect Buffet but find his kind of investing boring. We buy high and sell low riding loosing stocks till they hit "puke-point."
The interest free loans to the government are the only form of savings that most people have. Of course when we get that refund check, it's time to go shopping!
Of course, our financial situation is always somebody else's fault - never ours. Thanks for stating the obvious Neil.
7
@George N. Wells I would agree with you if you replaced the words humans and people with Americans. Other people all over the world are able to save large percentages of their income, often on vastly smaller incomes. We Americans, in the world’s richest economy, are so awful at saving that we have to loan our money to the government for free in order to save a few thousand dollars a year.
1
Not all Americans can't handle money. I know quite a few people who retired early because of living below their means and investing money wisely. Most of my neighbors are in this boat and so am I and my sister. We are in the minority it seems but we are here and living life being retired early (I retired in my early 40's my sister in her mid 50's) with no debt and no mortgage house paid for.
1
And don't forget that corporate income tax cuts are already trickling down to workers,
3
No, they're going towards stock buybacks.
5
@Douglas Johnston
I assume you're being sarcastic!
3
@Douglas Johnston - Uh, they are? Citations, please.
Most people are outraged because the media tells them they are paying higher taxes.
This is not true for most people. Only the wealthy in high tax states, who usually say taxes should be raised, are actually paying more.
Taxes should be raised, but not their taxes.
4
This year will be more telling.
2
“Why do they want to make interest-free loans to the government?
Do you ask the same question of yourself when you look at the $0.02 per quarter you bank savings account generates.?
49
@Mr. Louche Time value of money is a function of the inflation rate. Banks tend to lag a bit, but not to terribly far behind. So, unless you are willing to take more risk, you will be getting low interest rates. And, these 2 cents these days means that you have only one dollar in your savings account.
1
@Mr. Louche: The government helps to feed the hungry, clothe the naked and shelter the homeless. It is a charity that has an army.
The little that I give up to make that interest-free loan is insignificant.
They help build roads, too.
1
@Mr. Louche
It's not so much the infinitesimal bank rate, it's the usurious credit card interest rates that people pay all year. That interest-free loan to the government would - rationally - be better spent paying down high interest debt all year.
Of course, one of the main points of this discussion is people are not necessarily rational.
Thank you for a thoughtful article on this subject. An article that includes a real definition of the situation, not the typical: "Lower Refunds Equal Trump Tax Scam."
I am amazed how many people do not understand the difference between the refund amount and actual taxes paid.
Its disheartening to see us be so irrational.....but it does help to explain a few things!
9
I can't believe these people.
There was an example in a financial rag, a single taxpayer with an income of $60K taking the standard deduction, and having 0 allowance on a W-4. Her Federal tax drops from $7500 to $6000, so she's saving $1500 in tax. But apparently she's very upset, because her refund dropped from $2300 to $1800!
14
All part of Trump's plan to disguise the fact that the big cuts went to the rich. Just bump down the withholding rate and the people will think they got a bigger tax cut. You can fool all of the people some of the time.
31
If you think a low refund is a bad thing, then you shouldn't be setting economic policy. If you think a low refund is a good thing, then you shouldn't be communicating or implementing economic policy.
1
@Nick W
Friend, under TRUMP, the true value of the US Dollar is sinking like a very heavy rock...the more the Treausry prints, the more worthless the money in our *and everyones) bank account becomes...the current $21 trillion deficit makes the current dollar worth about 5 cents! if you're lucky....
2
@rj3 Wrong, so wrong. Monetary policy is formulated and effected by the Fed. Also, the value of the dollar is "eroded" by inflation, which has been pretty low and pretty steady. Which has nothing to do with Trump, incidentally. But, you really don't understand how this works. Deficit/government debt is a concern, surely, but the dollar is still the safe haven, especially given the political turmoil elsewhere.
4
This is why people think economists are non-rational.
1) Accumulating a large sum of money can be difficult. That extra $50 gets eaten away easily with things like lattes, phone bills, etc. Receiving it as a lump has a value in itself.
2) Current interest rates are essentially 0 anyhow (for people saving money). The best interest rate you can get is 2.35% and for a hypothetical $1000 you'd get all of $23.50 for the year and since you're adding to the account monthly, it's going to be more like $12 in interest for the year.
3) There's pleasure in getting a surprise at the end of the year. Is that pleasure of getting $1K that you weren't sure you would get worth $12? I think many people are fine with that tradeoff.
4) The negative cost of underwithholding is high. As I mentioned above, getting a lump sum together is hard. Most American households can't afford an unexpected $400 car repair. Avoiding an unexpected $400 tax bill is worth a lot to those consumers.
Economists should realize that their hypothetical "rational individual" are the equivalent of the physicists' spherical cow. People are rational in their own minds. You just need to understand what their reasons are. Lamenting that people don't conform to your model is useless. Your model needs to predict behavior and if it doesn't, it's flawed.
156
@Dave,
thank you for explaining human psychology to those making rational economic argument. there is nothing rational about the way people behave. their argument only works if the extra tax savings in the paychecks went into a savings account but it doesn't.
10
@Dave And that $400 car repair or $400 tax bill might have to be paid with a credit card - where interest rates are significantly higher than what is earned in a bank savings account.
16
@Dave Hence Thaler, Kahneman, and Tversky. Nobel prize winners all (well, not Danny, may he rest in peace).
5
First, a lot of middle class Americans had their taxes raised by Trump and the Republicans because of the loss of deductions and exemptions. Tax rates may have been cut, but many are paying more in taxes because of the loss of deductions that many working middle class folks rely on.
Second, it is beyond the pale that rich politicians and rich commentators keep insulting regular Americans about their complaints of reduced refunds under Trump's tax plan. Many Americans rely on those tax refunds to pay down debt, create savings, or make a large purchase. Since Trump and the Republican politicians have no understanding of living pay check to pay check they insult these folks.
Third, middle class Americans are upset because they see their taxes going up so that one of the Kocks can buy their third mega yacht.
110
@Sammy
No one in the middle class had a tax increase due to the tax cut last year. The standard deduction was increased to 12,000. A majority of people take the standard deduction and there's overwhelming evidence that the only people who itemize are the wealthy. If you're paying over 10,000 in state and local tax deductions, you're well off. I think taxes should be lowered for everyone, but it is infuriating to see progressives actually upset that the wealthy are paying more taxes because of the limitation of SALT deductions.
Also, maybe you should accept that the Kochs actually believe in free markets and aren't the evil villains you think they are. Portraying people who disagree with you as evil is lazy and it divides the country. Please put down the news and go outside.
5
@Sammy
Some are upset at the limit on SALT. Rather than complain to the feds, why not ask your state why they need so much more per tax payer than other states?
3
@Peter, the standard deduction was increased, but the personal exemption was eliminated, which means that for those not itemizing it's all a wash.
31
Perhaps people are angry because they did not see an extra 50 in their biweekly paycheck or get a 1300 refund.
Or perhaps they are angry because they got 200 dollars in tax relief while the rich got 200,000 dollars.
181
@alan My paycheck only went up by $1.70. That's not even $50 a year. An extra $50 in each paycheck is something I've only heard of in articles like this.
38
@alan
Fact: Mitt Romney paid $1.9 million in federal income taxes in 2012.
Fact: BHO paid $120,000.
Mitt never complained about "unfairness." The (D) ought to take a few days off from that meme, and do some math. Really. Not kidding. Seriously.
1
@Urko
Fact: The Obamas paid just over 20 % in taxes. the Romneys paid at a 15% rate. So Romney's rate was lower and the only reason he paid more was because he had a much higher income that the Obamas! You can't compare oranges and apples just because they are both fruits.
35
There are two main problems with taxes this year:
1. Most households seem unable to save. Over-withholding taxes gives people a "bonus" at the end of the year that they can use anyway they see fit. This forced saving provides an emotional reward. The 0.2% interest they can get in their bank account by getting more money up front is a ridiculously meaningless economic enticement.
2. The advice that people should review and adjust their withholding on W-4 forms is also ridiculous. If people have claimed, for example, 2 or 3 deductions, there is no reason why they should need to change that number because they changed the tax rate. If your family size has not changed, there should be no reason for you to have to change your deductions. The withholding rates set for paycheck size should cover the number of deductions claimed. For people who make estimated payments, it's a different story, but for the majority of people who just take the standard deduction, they shouldn't have to be fooling around adjusting their deductions.
104
@Minnoka, you mean "adjusting their exemptions," not their deductions.
2
@Minnoka
You're certainly correct about #1--one of the big reasons for higher withholding rates is that for people who cannot manage to save--and unfortunately, in a advertiser-driven consumer capitalist economy, in which people are manipulated into buying things they don't need, that's most people--the higher rates represent a forced saving, helping them not to overspend, even if it does result in an interest free loan to the government.
AND--the big purchases that are made from the resulting refunds provide a jolt to the economy at regular intervals, a jolt that wouldn't occur if people just got a few extra dollars in each paycheck.
Of course, lowered withholding that results in smaller refunds, or even in taxes being owed, just adds to the general resentment far too many have in paying taxes, anyway. Other nations seem to have better attitudes about paying taxes, but given ours, it's probably better to keep the over withholding/big refund model, if only to reduce tax resentment.
16
@Andy
Minnoka means payroll deductions. From the employee's perspective, an exemption is the opposite of a payroll deduction. By claiming the exemption, your take-home pay increases. Your payroll deduction decreases. It's the same thing said in different ways. Debit versus credit. You know?
1
The average person is below average. So they are unable to understand the idea that having your own money for longer periods of time (throughout the year) is better than loaning your money out for free and getting a refund (the following year).
I always have to remind people that it is THEIR OWN MONEY that they're loaning out for free to the government. No one else should have control of their own money. Having to owe the government a small amount of taxes the following year means you did something right.
17
@Dave K. - H-m-m, let's see. A free loan to the government or $20 in income from saving the money that was not withheld? I'm sure you're clients are grateful for the advice.
4
@Dave K.
Oh, I love that: "the average person is below average." Except if you come from Lake Wobegon! There the average person is above average! I'm sure they understand economics 101.
1
Of course refunds are easier and better - it's far simpler to give people their money back (and this year, the only reason why we got any refund was due to the child tax credit, otherwise we've underpaid) than it is to go chasing tax evaders to cough up.
2
@Griffin. Exactly. And, to pay the "right" withholding amount I would have to become expert on tax laws, continually update my knowledge, and devote time to this. Assuming I could get 1% on (e.g.) $2500 or so, I could get $20 (or so) by the end of the year. It's not worth the effort for me. It's less than a half hour's pay for how much work???
Ultimately, a rather long article by someone who thinks like an economist... and hasn't thought it through this
26
@Paul If one has to think like an economist to simply figure our witholding, they have to also think like an accountant to do their taxes...ergo the system is far too complex.
7
The real outrage is the SALT deduction limit which compounds the blue "giver" states that pay more in federal taxes than federal dollars spent in their state, compared to red "taker" states that get more federal spending than they pay in federal taxes. We in blue giver states have poor, need jobs, need help; and we should be getting a dollar of spending for every dollar we pay in federal taxes.
130
@rls
Maybe this will incentivize you to actually vote for a limited federal government and let the states govern themselves like the way our country was intended to function...
8
@rls - The bulk (75%) of Federal spending is for Social Security, Medicare, and Medicaid.
The Federal government is obligated to make these payments to all eligible recipients, regardless of which state they live in.
9
@Peter
If by "vote for a limited federal government" you mean to vote Republican, then your understanding is precisely backwards. It was Trump and the GOP controlled House and Senate of the past two years who limited those deductions as a way to extract more tax dollars from states such as CA and NY that typically vote Democratic.
And red "taker" states love the current system whereby they receive more money from the Federal government than they pay in taxes. You know, the kind of "socialism" they so hate if someone else might benefit.
38
Because it was actually tax reform anybody with half a brain should have expected their taxes to increase. If you had large deductions for state and local taxes and a regular job you should have expected to pay more. After all you are wealthy if you live in such a state and pay those large taxes. Progressives want the wealthy to pay more now they will.
4
@vulcanalex - Yes, of the additional money collected by eliminating these SALT deductions, about 50% of it will come from people in the top 1%. You would think that the libs would be pleased to finally be taxing these people.
3
@Jonathan - And who will the other 50% be coming from? Maybe those of us who are not so wealthy? To say nothing of the fact that over the ten-year life of the tax bill, cuts that benefit the middle class will be phased out while those benefiting corporations and the wealthy will not.
8
@vulcanalex You've convinced me and all of the other non-wealthy folks completely screwed by the SALT deductions. Am packing up and moving there. And voting.
1
how does this differ from previously? if we are paying fewer taxes overall, shouldn't we have had a larger paycheck (smaller deduction) monthly and a normal refund later? or the old deduction monthly and a greater refund later? moving money around is not the same as making more money. clever ruse...
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The cap on SALT and the elimination of exemptions has turned this into a huge tax increase for many of us, particularly those of us who make significant contributions to charity. The increase in standard deduction does us no good at all.
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@Andy That was tax reform, and surely you don't give to charity to get a tax deduction, that would be foolish.
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Not sure that the same tax return can suffer from SALT cap and lose charitable contribution deduction- either you itemize, and take the hit on SALT, or you take the standard deduction because it is greater than itemization (but even then you aren’t “losing” so much as just not gaining.)
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@vulcanalex. Said the guy from a taker state
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It's amazing a country as advanced as The U.S. has such a backwards system.
Here in Ireland, as I'd imagine happens in most countries, tax is taken at source and there's no paperwork to be filled out, save for a five minute form at the start of the following year to claim expenses (20% refund on health expenses etc.) if you'd like to.
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@DKB Backwards??? I bet you don't have say investments of various types, or are retired. We could be foolish and have a value added tax like I bet you do.
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@DKB And you trust your government to calculate your tax for you? That's a crucial tradeoff under Ireland's system. Government, being made up of human beings, has a habit of being wrong, and the wrongness is unlikely to be in favor of the human being paying the tax -- who at least has a strong financial incentive not to overpay.
Now, I believe Ireland also has a relatively simple tax structure, so that may mean there's less opportunity for the government to be wrong. But "less" isn't "zero."
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@vulcanalex: "We could be foolish and have a value added tax like I bet you do."
It's a lot better when it's call it a "sales tax" (and when the customer has to estimate the added cost for everything they buy (except for the things non-taxed items (if you can remember what they are (what state and county am I in?))).
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