Smaller Tax Refund? Big Deal!

The mainstream media is abuzz about the smaller tax refunds being sent out by the IRS this tax season. The New York Times says, “Smaller tax refunds surprise those expecting more relief”, CBS News says, “Americans shocked by impact of new tax law”, while Fox News says, “Smaller tax refunds are a good thing”. Each media outlet has their own spin depending on their agenda, but the real issue is the lack of financial literacy and planning to avoid surprises that could have easily been avoided.

The new tax laws effective for 2018 were well communicated if anyone took the time and energy to understand them; certainly the tax and planning industry was well-versed in the impacts. The elimination of tax deductions due to the $10k limit on state and local taxes (SALT) and the limit on the interest deduction on high value mortgages became a new tax burden for residents in high tax and high property value states. The almost doubling of the standard deduction was intended to lessen that burden, but some high income earners with large SALT and mortgage interest were sure to see an increase. So, taking the lowered payroll withholdings due to the lowered tax brackets was a flawed assumption if you ignored the loss of those large deductions in your tax planning.

Alternatively, if you were NOT a high income earner, your total Fed taxes likely went DOWN, but you simply got a smaller tax refund because you took a portion of your end-of-year refund in smaller bits during the year due to the lower withholding amounts. Effective planning could have easily avoided this “surprise”. Moreover, consistent with the Fox News article, a Treasury spokesperson said in a statement, “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.” Unfortunately, this seems to have happened to some taxpayers due to inaction and ignorance instead of through conscious planning.

Keeping more of your money during the year with an effective saving and investing strategy makes much more sense than giving the government an interest-free loan during the year. Hopefully, this kind of event will cause a more focused interest in financial education and planning.