So I just finished my taxes, and in other diaries I’ve seen a lot of people expressing concerns about what to expect. I finished my own taxes just a bit ago, and I was bit by the tax law changes. I’m careful and will be fine, but it was a nasty surprise. So let me share what I saw on my tax forms, and an easy way for some folks with straightforward tax situations to see if they’ll be bit like me.
(standard disclaimer. Taxes get complicated fast, I’m not an accountant, and there is no tax advice in here)
The history: In 2017, the Trump administration ‘cut’ taxes.
For a lot of Americans, the changes in law can be summarized as follows:
Doubled standard deduction (from 6K single/12K married to 12K single/24K married).
Doubled the refundable child tax credit from 2K to 4K.
Eliminated some common deductions.
The administration also pressured the IRS into making a dirty change. They reduced the standard withholding amounts. That’s where the magic happened. They did this for the completely obvious and purely political effect of trying to give people a ‘bigger’ paycheck www.cbsnews.com/… . They also did it in the most predictably assholish way possible, by making the withholding reduction about equal to the standard deduction.
What happened to me:
My tax refund was way smaller than last year. The withholding changes wiped out 95% of my baseline refund. The much touted doubling of the standard deduction was worth about as much as the mice my cat leaves on the carpet. (though with my cat I can at least appreciate the love he brings along with, and he gives me snuggles and purrs). If it wasn’t for the child tax credit being refundable, I wouldn’t have gotten squat.
I deconstructed my return to see what happened to my money. Basically, it looks like the IRS precomputed withholding to match the ‘average’ american family with 2 deductions and the standard deduction, and ‘baked’ it in to their formula. This essentially gave everyone a major part of their tax refund split paycheck by paycheck throughout the year. By touting it as a ‘pay raise’, they essentially told Americans NOT to save it, even though most Americans use the tax refund as a savings source and depend on it as an annual lump income. That is why purchasing spikes in the May time frame, as refunds go out and Americans spend it.
For you:
Here is how you can follow what I found to get an easy, early read on your taxes. This won’t give you a strongly accurate number, nor is this a substitute for actually doing your taxes, but it can give you an idea on how much things might change and an up or down sense of whether or not you’re in trouble or close. The goal here is to work with easy numbers to get a sense, not accurate numbers. This is also written to ignore small benefits to get a worst case sense.
1) Get this year and last year’s W2. If you made about the same as last year, skip step 2:
2) If incomes are off by more than about 25%, take last year’s W2, and divide your federal taxes withheld block from your total income. That’s the baseline withholding expectation (This is how much you *thought* you would be paying uncle sam since you didn’t make any changes.) Multiply that withholding rate by this year’s income to get your baseline expected withholding.
3) Subtract this year’s federal taxes withheld from last years’ (or the expectation from step (2). For me that made a pretty good estimate of where you’re starting from for your refund, compared to last year.
4) Now add 2 more elements, from last year’s taxes.
Look at your total deductions and compare them to the new standard deduction threshold (or if you took the standard deduction last year). If your total deductions were more than the standard deduction, there was no benefit from that change.
If you took the standard deduction, ballpark it at $2700. If your deductions were between the old and new standard deduction, add in a proportionate amount.
Note: If you rely on critical, large deductions every year you’ll need to google and check the impact. That’s firmly in the complicated camp. As a note though, most deductions offset only 24% of their value; $240 per $1000 in deduction, so you can use that as a ‘what if’ guide to guess what would happen if it disappeared.
5) If you have dependents, add $480 per child.
Those steps got me close to my actual refund. Good luck.