You’ve heard all the hype about the new tax law. Perhaps your paychecks were a bit bigger in 2018. But lots of people have one question on their minds right now.
Am I going to get a huge tax refund this year?
Maybe. But maybe not.
First, let’s look at what all the fuss is about. The Tax Cuts and Jobs Act (TCJA) brought many changes, but the one that’s going to be the most significant to the most Americans has to do with deductions.
Here’s what hasn’t changed—you have two options when it comes to deductions.
- Take the standard deduction, which is a fixed amount based on your filing status.
- Itemize your deductions and deduct things like your mortgage interest, charitable giving, state and local taxes, student loan interest and numerous other categories.
Whether you chose to itemize or take the standard deduction depends upon which one is larger. Prior to 2018, an average of 30% of households itemized their deductions because they had enough expenses to deduct that totaled more than the dollar amount of the standard deduction.
With the TCJA starting in 2018, the standard deduction went way, way up for all filing statuses. In most cases, it almost doubled. Along with that change, many deductions were lowered or eliminated altogether. For about 90% of Americans, it will no longer be beneficial to itemize because the standard deduction will be larger than the sum of your individual deductions. For many people, doing your taxes will be simpler this year.
About 2/3rds of Americans will pay less money in taxes in 2018 than prior years—even if they itemized in the past. However, that doesn’t necessarily translate to a big refund. Did your paychecks increase in 2018 without you receiving a raise? That’s because your tax withholdings were adjusted to account for the fact that you would owe less in taxes overall for the year. In that case, your lower tax burden does not equal a large lump sum payment at tax time.
If your withholdings weren’t adjusted, or if you intentionally had more taxes withheld, then yes, you may be receiving a bigger tax refund this year. While it can be exciting to get all that cash at one time, remember that you’re giving the government an interest-free loan by having more tax withheld from your paychecks than what you owe for the year. If you find out you’re getting a huge refund, talk with a tax preparer about how you should adjust your withholdings for 2019 so you can get that money in take-home pay throughout the year. Even if it sits in a savings account, you’re still earning interest and will have the cash on hand for emergencies.
How do I know if the TCJA is a good deal for me?
The truth is, your refund has nothing to do with whether you paid more or less in taxes—it tells you whether your withholdings are appropriate or whether you’re paying the right amount in quarterly estimated taxes.
There’s only one way to know if you got a tax cut this year: compare your 2017 tax return to 2018. Specifically, check your total income and total taxes for each year. If the income amounts were relatively close, how do the tax totals compare? Now, if you had a life event in 2018 that had a significant impact on your taxes (for example, you got married, had a child, or had a substantial increase in your income), you’re not really comparing apples to apples. But all things being relatively equal, this is the best way to know if you benefitted personally from the TCJA.
Do you need help preparing your tax return this year? Contact us to get started.