A local CPA gives his take on why tax refunds are trending lower in the first full year of the new tax law
VANCOUVER — For one Colorado woman, this tax season ended in tears. For others, it has been less dramatic, but the IRS says early tax refunds are down around 9 percent over last year.
The news prompted numerous headlines and claims that the first full year of the Tax Cuts and Jobs Act was proving to be less than advertised for most of us.
“There’s not a lot of integrity in headlines like that, in my opinion,” says Greg Railsback, a CPA with Railsback Johnson, P.C. in Vancouver.
“For a lot of people the withholding tables changed, and that may not have been as well publicized,” Railsback says. “And maybe for political reasons? I mean, who knows if it would’ve been better to not adjust the withholding tables and give people larger refunds so they felt like they got more money.”
According to surveys, half of Americans are unclear about how the new tax law affects their W-4 withholdings, and nearly 3 in 10 weren’t clear what had changed with the tax reforms.
From what Railsback has seen so far many people are seeing smaller refunds, or owing when they didn’t before, but likely saw a larger paycheck throughout the year. “They spent it one month at a time instead of having this large sum of money that they historically spend all at once.”
Railsback says his goal with clients is actually to get them the smallest tax refund or bill possible. “For my mind, if we have clients that get large refunds, we kind of missed something in the planning.
“It’s always a curious thing to me where some people’s mindset is ‘hey, I want this big large refund,’ when in reality all you did was give the government an interest-free loan over the course of the year,” he continues. “If it’s your money, why not keep it and set your withholdings at a rate that leaves it to where you have maybe a small refund?”
Americans have increasingly come to rely upon their annual tax refund check as something like a post-Christmas bonus, and news that those refunds might be smaller or non-existent this year led to plenty of hand-wringing.
Still, the IRS says it’s early in the tax filing season, and people who may see a larger check back from the government, including families with multiple children, generally tend to file later.
The new tax law increased the per child tax credit from $1,500 to $2,000, and expanded eligibility for the credit. But people who itemized their taxes in 2017 and plan to use the higher standard deduction this year are likely to see a smaller refund or end up owing.
Railsback says one of his clients has four children, and previously didn’t qualify for the child tax credit. This year they’ll be getting $8,000 back, “so you can’t tell me that that wasn’t significant.”
The rich get richer?
The uncertainty around the effect of the new tax law also created plenty of headlines alleging democrat warnings that it would benefit only the wealthy had come true.
Railsback, who calls himself a “straight shooter” who doesn’t have a political allegiance, says whether you feel like the wealthy were the primary beneficiaries of the new tax law depends a lot on your perspective.
“Clearly somebody who makes a million dollars a year, their tax reduction is much greater than somebody that makes $75,000 a year, because they pay a lot more in taxes,” says Railsback, “so their dollar savings are going to be greater. And even their percentage because they were at a much higher tax rate.”
Under the new tax law, five of the seven tax brackets saw their rates lowered.
“The higher income tax rate, they’re still paying the vast majority of the income taxes in this country,” says Railsback. “That’s not changed under the new tax law.”
One thing Railsback says he wants his clients to understand is that these tax cuts are currently set to end by 2025, and many of the brackets will see increases before then. Congress could act to extend the cuts, or they could eliminate them sooner. So his primary advice is to enjoy the savings while they last, but prepare for a higher tax bill in the near future.