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Tax Refunds vs. Tax Burden
It is expected that individuals will receive smaller federal tax refunds than they did last year. Does that mean people are paying more in taxes? No, but will that stop people from making that claim?
The average tax refund is down about $170 compared to last year. Let’s call the President’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%.
— Kamala Harris (@KamalaHarris) February 11, 2019
A refund is an overpayment. If you paid $5,000 through withholding and your actual tax bill is only $4,000, you will get a $1,000 refund. In other words, you gave the government a $1,000 interest-free loan and now they are paying you back. If your tax bill was $4,000 and your withholding throughout the year was $4,000, then you won’t get a refund. In both examples, you paid $4,000. The fact that you did not get a refund in the latter example doesn’t change anything.
When the new tax laws were implemented, the withholding tables were also adjusted so that people could see the benefit of lower taxes in your paychecks immediately. Are middle-class taxpayers paying more or less under the new plan? Is this, “a middle-class tax hike to line the pockets of already wealthy corporations and the 1%”? Probably not. How this works out as a whole is yet to be seen. For me, the increased child tax credit leaves me with a lower tax burden. However, if I did not have kids, I would be paying more under the new tax laws. To tell if you are doing better or worse under the new tax laws you will have to look at the amount of tax you are paying, not the size of your refund.
When I hear people talk about their taxes, they are more likely to mention their refund rather than the amount of tax paid. Since withholding happens before you ever see the money, people think in terms of net pay rather than the gross. So when they get some of those taxes back the act like they won something. The truth is, a lot of people don’t really know how much they pay in taxes. Your payroll taxes come out before you ever get the money. Your property taxes are often hidden in your mortgage payments. And if don’t know how much the government is taking from you, how likely is it you’ll ever complain about how it gets spent? Know how much you are paying. Look at your federal taxes, your social security tax, your state tax, your local taxes. Add them all up and see if that doesn’t make you just a little more of a conservative.
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Harris is a skilled propagandist – she takes a half-truth (tax refunds are lower) and uses it to evoke an emotional response in an otherwise unknowing audience.
Good discussion and analysis, @vancerichards. Harris deserves all the ridicule we can send her way.
A few things have changed this year. First thing I noticed was that you can no longer claim yourself or your spouse as dependents. So for us with two kids, we could only claim two dependents, whereas in the past we’ve always claimed four.
However, the standard deduction has increased and offsets that a bit. So for us, “married, filing jointly,” the standard deduction went from $12,000 to $24,000.
Similarly, the child tax credit went from $1,000 per child to $2,000 per child.
For our tax bracket the difference this year has meant a larger federal refund than usual, but this is only because I also had extra withheld last year just to cover for myself. About a quarter to a third of my income comes from self-employment income, so I always have extra withheld from my employer just to cover for the self-employment taxes. And in 2018 I increased what I was having withheld because I had a sense I would end up owing a chunk.
If I wasn’t having extra withheld, even with the increases to child tax credits and the standard deduction, I think I’d come out about even. But I ain’t gonna risk having a tax bill at this time of year. (On top of all the other bills I struggle to pay.)
Our total Federal tax bill for 2018 was 6% lower than 2017, and 16% lower than 2016. However, we owe money now instead of being due a refund, mainly because of an unexpected (and quite large) capital gain, and because of the lower withholding during the year.
We had higher itemized deductions than we’ve ever had (a new mortgage and property taxes in two states), but the new standard deduction was even higher than those highest-ever itemized ones.
I’m fine with paying what I owe now, because I kept that money in my “pocket” during the year.
The tax reform was beneficial to us, as I expected it to be. We are retired, house paid off, so we were already using the standard deduction. Double the standard deduction? Whoopee! We paid about $1K less in federal taxes.
I’ve never understood the ordinary wage earner celebrating getting a 5K refund. For goodness sakes, adjust your withholding to get yourself another $400 a month in income. Sometimes I’ll hear a comment by someone talking about taxes and realize that there are a ton of people who are incredibly ignorant about why they pay what they do. When I was working we almost always broke even on our tax returns.
The greatest con the government ever pulled was Withholding Taxes.
If everybody had to pay quarterly, as we self-employed do, in less than a year, there would be a tax revolt like nothing this country has seen since the original Tea Party.
That’s by design. Just as with health care (as in The Insurance will pay for it… kind of a sort of friendly Tooth Fairy or Easter Bunny,) if people knew what they paid in taxes they would be much more engaged. Most people have no idea what they pay in total or what their marginal tax rate is.
I’m not sure about that. We don’t have “savers” in this country, and people will just not pay and end up with fines they couldn’t pay, or pay and go on assistance for everything else. And our Congress would end up devising even more targeted credits that would shift the burden toward the higher-earners more than it already is. Likewise, we’d end up with more people on welfare programs and once again “soak the rich” for not paying their “fair share.”
Whatever would happen, if a mass of people truly did complain, it would not result in the federal government lowering the tax burden by cutting spending. That just doesn’t happen.
Rather, the left would try to come up with even more government entitlements.
I plugged all of my 2017 tax information into the 2018 tax software and found about a 10% reduction in net federal tax. Most noticeable change was moving from itemized deductions to the standard deduction – which means no more trying to come up with valuations for the carloads of stuff we take to Goodwill, Salvation Army and Purple Heart every year.
The stuff about “reduced refunds” is idiotic. It’s like claiming that I’m disadvantaged by the fact that I get less change back on a ten dollar purchase if I pay with a twenty instead of a fifty.
I fear you are right that Harris is skillfully propagandizing to the ignorant public. Nonetheless, I would enjoy watching someone take her tweet seriously and then point out that since she believes that she is clearly too stupid to deserve my vote.
People are not going to get as much money as last year so the government screwed them out of the money. Trump and the GOP did this so they get the blame. It is just that simple.
Thanks. Yes, this is a cheap trick by Harris but it will work with a lot of people.
Yes, it is dumb but people like getting the lump sum. I have tried to explain to friend that if he had them take out less, he could open a second bank account and have his direct deposit put $100 or $200 in that account every paycheck and then have the rest go to his regular account. That way the money would be separated out, just into an account he owns rather than the government’s.
It would be nice if high schools could teach some basic home finances. Things like balancing a checkbook, how to save money, etc. I see a lot of otherwise smart people who seem rather careless when it comes to money.
I’ve wanted politicians or reporters to challenge Democrats calling for the rich to pay their “fair share” by asking, “so you want to lower tax rates on the rich?” The rich carry an outsized portion of the tax burden and if the goal is fairness, then the people on the lower end of the scale need to do a little bit more lifting. Yes, it’s a pipe dream of mine. The person bringing that up would be pilloried by the press, but the whole framework of the tax debate needs to be restructured.
I agree, but if someone asks, “how do you know that?”, what should I say? If they say, “you just gave your assumption as if it were a fact–that just makes you sound stupid!” how should I respond?
I accidentally clicked onto the comments on a Bernie Sanders Facebook post yesterday about this topic. It is astonishing how many people swallow this whole.
Then again, most people haven’t the slightest idea of their actual effective federal tax rate.
The most recent data as to taxes/income I think is for 2013 data published in 2016. The non-partisan CBO publishes the actual distribution of household income and income taxes based on federal data. It’s readily available and not an assumption and not subject to debate. The only debateable aspect is whether that’s fair to those paying the taxes.
People use the withholding and refund system as a sort of forced savings, where the money is out of their, and their family’s, hands. They plan major expenses, like a delayed car repair, new tires, a home improvement, on that pot of money they, and their family, could not raid throughout the year. That is just a reality that has developed in the course of the history of payroll withholding. This is not stupid, it is not necessarily even a sign of ignorance.
Since the changes in withholding happened at the beginning of last year, it is entirely the fault of the GOP that they did not go around prompting constituents to look at their pay stubs, showing the breakdown of taxes withheld. Instead of mocking Nancy Pelosi’s “crumbs” comment, the GOP should have been all over the country, leading Americans in self-discovery about their earnings.
True if interest rates are near zero. If interest rates rise, however, so does the cost of parking your money with the feds. At some point, it becomes stupid to do so.
The Feds may have updated the withholding tables, but they did not issue a new W4 worksheet for employees. Most average taxpayers don’t even know they can change their withholding.
The first year Ray and I were married, we had a big tax bill at the end of the year, since we had little idea of what our liabilities would be. Because of that, I had to start quarterly estimated tax payments. Once we figured out our situation, things were not so negative, and I still pay estimated taxes, based on all the investment earnings I have that have no withholding (I am a pretty successful investor, with a fair amount of dividend income). In 2018, I paid higher quarterly estimated taxes, knowing we might get burned by no longer being able to itemize like in prior years. I may actually do our taxes this weekend, and it will be interesting finding out how our situation has changed.
General rule is there’s a “safe harbor” provision to protect you against underwitholding penalties if you have at least as much withheld (or paid in quarterlies) as your net liability the previous tax year.
If you do wind up underwithheld for the year by more than 10% of your net tax liability you’re subject to penalty, but for this year because of the change in the law they’ve made it 85% instead for the automatic penalty waiver.
I’m underwithheld by a couple thousand dollars, and within a few hundred dollars of getting penalized. Still waiting on my final brokerage statements to find out for sure.
I think she knows what she’s doing. She knows how to manipulate her base by being dishonest….
But then I wonder. I hear other interviews where she’s talking about economics and sometime I believe she really is this dense. I’m not sure which is worse.
Never underestimate an individual’s inability to understand basic economics.
Think of it as Uncle Sam’s Layaway Plan!
Well, it *is* Harris. She’s quite comfortable being an idiot, or a liar.
While I agree that the GOP failed to clearly explain the effects that would ensue at tax time, I must disagree that planning on a big refund is not a sign of stupidity or even ignorance. In discussing this over the years with co-workers in several very different industries, financial acumen is in rare supply. I would only rarely discover someone who understood and would admit that it was a forced savings plan for them. Trying to explain that inflation alone was reducing their payout was virtually a waste of time for most people.
There is a reason why BHO was elected twice.
The logic that a lower income tax refund must automatically mean higher taxes is the exact same as the logic that an electric car must by definition result in less carbon emissions than a car with an internal combustion engine.
I share Drew’s skepticism on this.
I also agree with several others here that too many Americans are lousy with their finances regardless of how our tax system is implemented. Just look at how many retail banks financed free checking accounts paid for by penalties on overdrafts, or how many credit card companies can offer great conditions to responsible customers paid for by everyone else who can’t keep on top of their payments. And the people who miss payments or miscalculate their available balance tend to be on the lower side of the earning spectrum.
If people wrote their own checks, the government would have a financial incentive for people to be lazy or careless with their finances. That’s not a good scenario.
I have a professional prepare my taxes. I have asked him how things are shaking out for his clients, in general. He said most of his customers are paying a little less, but it’s not earth shaking. We live in lower tax States, so the $10K limit for State tax deduction doesn’t hurt us as much. I really won’t know exactly how I stand for another month. I am retired, but have some passive income.
I never saw this tax bill as being a huge reduction for the average Joe. The main benefit I discerned from this bill was a lowering of corporate taxes to a level that made the USA competitive globally. By doing that, large corporations would be encouraged to bring their headquarters back to our country, with more jobs, and higher wages. That is, I believe, what is happening. The Republicans need to be explaining this or they will get rolled by the Dems. But they are, as everyone knows, marketing challenged.
Yeah, I would have been happy if they just changed the corporate rate without touching the individual taxes. I guess politics makes it necessary to make changes just because. On the other hand, it made Andrew Cuomo mad, so there’s that.
I recently saw a Chevy Volt with a “I burn electrons” bumper sticker. Our electricity is provided by a coal plant, so Mr. Volt driver “burns” his electrons that were created by someone else burning coal.
People are quick to say, “But it’s electric” without much thought about where electricity comes from. I don’t see any fumes coming out of the socket so it must be clean.